The purpose of this blog post is to discuss the key differences between a cash credit and an overdraft facility. We will explain what each product does, and provide some tips on when each product might be most applicable. At the end of this article, we hope that you will have a better understanding of both products and be able to decide which one is best for your business needs.
What is Cash Credit?
Cash credit is a type of loan that allows businesses to borrow money up to a certain amount. The loan is secured by the business’s assets, and the business must make regular payments on the loan plus interest.
- Cash credit is typically used for short-term borrowing needs, such as inventory financing or working capital. Cash credit is distinct from other types of loans in several ways.
- First, cash credit typically has a lower interest rate than other types of loans. Second, cash credit is revolving, meaning that the business can borrow and repay the loan multiple times as needed, up to the maximum loan amount.
- Finally, cash credit is usually unsecured, meaning that it does not require collateral. Cash credit can be an attractive option for businesses that need flexibility in their financing.
What is Overdraft?
Overdraft is a type of credit that banks and other financial institutions may extend to their customers. An overdraft allows account holders to continue withdrawing money or making payments even if they do not have enough funds in their account to cover the full amount. This can be helpful in emergency situations, but it can also lead to costly fees if the account holder does not repay the Overdraft balance quickly.
Overdraft is typically a short-term loan, with lenders typically requiring repayment within 30 days. Interest rates on Overdrafts can be high, so it is important to understand all the terms and conditions before using this type of credit.
Difference between Cash Credit and Overdraft
Cash Credit and Overdraft are two types of bank facilities that allow customers to withdraw money from their account even if they don’t have sufficient balance.
- Cash credit is a type of loan that needs to be repaid with interest, whereas an overdraft is a type of credit facility and is interest-bearing. Cash credit is given by a bank against the security of collateral such as property or shares, whereas an overdraft can be availed without any collateral.
- The limit of cash credit is decided by the bank based on the value of collateral, whereas the limit for overdraft is set by the bank based on the customer’s creditworthiness.
- Cash credit is given for a short period, usually for 1 year, whereas an overdraft can be availed for a longer period. Cash credit is suitable for businesses that have irregular cash flow, whereas an overdraft is better suited for emergency expenses.
Conclusion
Cash credit is an arrangement where a business can borrow money up to a certain limit from a financial institution. The interest rate is usually lower than what’s charged on a loan, and the borrowing limit is based on the company’s cash flow. Overdraft protection is when you link your checking account with another account or line of credit so that if you accidentally spend more than you have in your checking account, the bank will cover the shortfall. This can be helpful for people who tend to live paycheck-to-paycheck, but it can also be expensive if you’re not careful about how much you’re spending.
