Cash Credit / Overdraft Facility

Cash credit is a short-term business loan. It is meant for entrepreneurs wanting to get quick working capital. An overdraft facility, on the other hand, is a long-term financial assistance. It lets you withdraw money from your account even with zero balance.

Both are generally referred as credit facilities banks or lenders offer borrowers. Your lender uses the hypothecation of the company’s inventories for the purpose. Certain financial institutions even consider bank statements.

Cash credit and overdraft facilities may appear similar at a glance. However, the two are entirely different financial products.

Here are some of the factors that set the two apart:

Features

Cash credit

Overdraft

Purpose

To help you buy raw materials, take care of receivables and maintain stocks

To keep your business operational

Purpose

To Purchase Raw Material “

To fulfill non-business requirements

Calculating rate of interest

Based on the entire amount you withdraw

Based on the amount used

General rate of interest

Lower

Higher

Bank account

Need to open a separate account

You can use your current account to avail the facility

Maximum amount

Up to 60% of the value of your inventories and receipts

The lender decides based on your account and your relationship with the institution

Limit of withdrawal

Can be changed based on the value or quantity of your inventories

Cannot be changed. Your current balance may influence your current account