Capital is an essential factor that impacts your business’s smooth functioning. While you can procure money through various sources, two of the most popular short-term borrowing options are cash credit and overdraft. They are used by businesses and individuals to access funds when required.
Cash credit and overdraft are similar in many ways, but there are also some key differences between the two.
Cash credit is a short-term loan that is granted to businesses and individuals by banks and financial institutions. It is typically secured by collateral, such as inventory, property, or other assets. The loan amount is based on the value of the collateral and the borrower’s creditworthiness. Cash credit is typically used for working capital or to finance business needs.
Overdraft, on the other hand, is a type of credit that is linked to a checking account. It allows account holders to spend more money than they have in their account, up to a pre-approved limit. Overdrafts are typically unsecured, meaning they are not backed by collateral. They are usually granted based on the account holder’s credit history and ability to repay the loan. And they are typically used for personal or everyday expenses, such as groceries or bills
How are they different? In terms of structure
One of the main differences between cash credit and overdraft is how the loan is structured. Cash credit is a formal loan agreement with specific terms and conditions, while an overdraft is an informal arrangement between the bank and the account holder.
In terms of usage
Cash credit loans are typically granted for a specific purpose, such as working capital, while you can use overdrafts for any purpose.
In terms of interest rate
Another key difference is the interest rate. Cash credit loans typically have a lower interest rate than overdrafts because they are secured by collateral. Overdrafts, on the other hand, tend to have higher interest rates because they are unsecured and considered higher risk.
More so, interest on cash credit is calculated on the entire amount you decide to withdraw. In overdrafts, the interest is charged only on the utilized amount.
In terms of duration
Another difference is that cash credit loans are typically granted for a specific period of time, while overdrafts are ongoing, with the account holder able to continue borrowing as long as they maintain their account in good standing.
In terms of repayment
Cash credit loans usually require regular payments, while overdrafts are typically repaid through an automatic debit from the account holder’s checking account
In terms of availability
While cash credit is available to businesses only, an overdraft is offered to companies and entrepreneurs.
In terms of bank account
To use cash credit, you will need to open a separate bank account. However, you can use your existing bank account when using overdrafts.
In terms of withdrawal limit
When it comes to cash credit, you can only withdraw up to 60% of the value of your receipts and inventory. In overdrafts, your bank or financial institution determines the withdrawal limit.
Besides, the withdrawal limit charges for cash credit depend on the quantity and value of your inventory. Your lender will not charge for withdrawing from your overdraft facility.
Which option is best suited for your business?
Once you know your business goals and why you need the capital, you will be in a better position to choose from the above credit options. For instance, if you wish to improve your credit score or repay your loans on time so that your business stays afloat, you can opt for the overdraft facility with your lender.
But if you are looking for a short-term loan only for working capital, then cash credit is a better option.
Cash credit and overdraft are two forms of short-term loans that businesses and individuals can use to access funds. However, there are some important differences between the two— such as interest rate, repayment structure, and usage —that you should know before opting for a credit facility for your business. Andromeda offers the best deals on your business capital needs. With minimum documentation and quick turnaround time, you can avail of a business loan. You can also use our business loan EMI calculator and know the EMIs