What is the difference between Cash Credit and Overdraft?

As business owners, we have various options for getting financial assistance to make sure we have sufficient working capital. To meet the expenses of the day-to-day operations of our business, we require working capital. To meet these business requirements, we should choose the best kind of loan based on the nature of our business. Cash credit and overdrafts are two common kinds of short-term loans. We may use these terms interchangeably, but they differ in many ways. Let us look at the difference between cash credit and an overdraft.

What does Cash Credit mean?

As business owners, we can use a financial instrument called cash credit, a short-term loan to finance our company’s working capital requirements or operational expenses. This facility allows our companies to withdraw money without keeping a credit balance but only up to the borrowing limit. “Working capital loan” is another name for this facility. The interest is charged on the availed limit out of the total borrowing limit.

What does overdraft mean?

Generally, banks and financial institutions provide an overdraft facility to individuals and companies with good relations. This facility allows us to withdraw over the amount deposited in our bank account. The bank charges a pre-specified interest rate on the amount overdrawn. Moreover, there is a pre-determined authorised limit dependent on our relationship and history with the bank, up to which we can overdraw.

How is Cash Credit different from Overdraft?

Cash credit and overdrafts differ in terms of purpose, interest rate, duration, security, limit, etc. Let us see some significant points of difference between the two facilities.

Why choose FlexiLoans?

As business owners, we require business loans tailored to our needs and requirements. We at FlexiLoans have built a technology-powered online business loan platform by taking note of entrepreneurs’ financial needs. Through this platform, we empower small businesses, entrepreneurs, and MSMEs by providing easy, quick, hassle-free, and customisable collateral-free business loans. Along with this, we have minimal documentation for loan processing. We understand that businesses need loans on short notice and thus offer quick disbursal of loans, i.e., within just 3 days. Apply for a working capital loan, line of credit or unsecured business loan in Jaipur, Ahmedabad, Delhi, Chennai, and more!

Conclusion

Now that we know the difference between cash credit and overdraft, we can decide whether to avail of the former or the latter. Moreover, we need to consider the interest rate the concerned institution charges, how we wish to utilise the funds, and the limit we get sanctioned. A clear understanding of such grounds will assist us in choosing the most suitable instrument of the ones available which are best suited for our entrepreneurial needs.

FAQs

What are the benefits of cash credit?

Cash credit comes with a minimum commission charge and can be arranged easily with flexibility. Moreover, interest payment on cash credit is tax deductible, reducing your business’s tax liability.

How is interest on overdraft calculated?

Interest on overdrafts is calculated based on the average daily balance method wherein the daily closing balance is considered.

What happens in the case we miss overdraft repayment?

In this case, the bank or financial institution can deduct the outstanding amount and the interest rate from our bank account.

For what kind of working capital needs can we avail of cash credit?

We can use the sanctioned money to finance sales, procure raw materials, pay salaries and rent, store and warehousing and maintain inventory.