Difference Between Cash Credit and Overdraft

Cash credit is like a quick loan for small businesses that need money right away. Whereas an overdraft is where you can borrow even if you don't have money in your account.

You must pay back the loan whenever the lender asks, and the amount you can borrow depends on what you can offer as collateral. There are different types of cash credit, such as borrowing against stock, book debts, or packing credit. Overdraft, on the other hand, lets you take out more money than you have in your bank account, but it's linked to your current account.

There are two types of overdrafts: clean overdrafts and secured overdrafts. Overdraft works like a continuous loan account and is like a regular bank account. Both cash credit and overdraft are given based on assets related to the business, and interest is charged only on the amount used, not the total loan amount.

Businesses, regardless of their size, often require financial assistance to support their day-to-day activities. Given the frequent need for loans to cover both short-term and long-term expenses, various financial options are easily accessible. Among the commonly sought-after forms of loans are cash credit and overdraft facilities.

What is Cash Credit

Cash credit is a type of short-term loan that banks give to small and medium businesses to help them handle their financial needs. With cash credit, business owners can borrow money even if they don't have enough money in their accounts. It's like having a current account with the option to overdraw.

The bank charges interest only on the money that the customer takes out, not on the whole cash credit loan amount. This is a big reason why businesses choose this type of financing instead of other options.

Key Features of Cash Credit

• Cash credit allows you to borrow funds even without a credit balance, yet the lending organization determines the borrowing limit.
• The sanctioned amount must be repaid promptly upon demand, granting the lending institution the prerogative to request repayment at any juncture.
• The extent of the borrowing limit is somewhat contingent upon the value of the assets pledged as collateral.

Different Types of Cash Credit

1. Cash Credit Secured by The Hypothecation of Stock

Most banks and financial institutions provide this type of cash credit facility, using raw materials, finished products, and works in progress as collateral.

2. The Hypothecation of Book Debts Backs Cash Credit

Financial institutions typically provide this type of cash credit against book debts, which encompass debt entries recorded in account books resulting from sales transactions.

3. Packing Credit

Packing credit is a type of cash credit provided by banks to exporters. It facilitates the procurement of raw materials from local suppliers for export preparation. Typically, this credit facility is offered to customers in the local currency.

What is An Overdraft

A short-term credit extension that banks and other financial institutions provide to current account customers is known as an overdraft facility. Under this kind of loan arrangement, borrowers can conveniently take out more money than is available in their current account, subject to a predetermined ceiling imposed by the bank or lending organization.

Based on a person's credit history, an overdraft facility may be available. The consumer may take out money as needed, regardless of whether they are an individual or a business.

The borrowed amount must be repaid through deposits into the current account. Overdraft facilities can also be granted with the security of self-liquidating investments like shares, debentures, UTI units, etc.

Different Types of Overdrafts

1. Clean Overdraft

In a clean overdraft, the overdraft facility is provided in a current account without requiring any physical collateral.

2. Secured Overdraft

A secured overdraft is a type of overdraft that is backed by self-liquidating securities.

Key Features of Overdrafts

1. Overdrafts are like a flexible loan account. You can take money out or put money in whenever you need to.
2. Overdraft accounts work a lot like regular bank accounts.
3. Interest on overdrafts adds up every day, but the bank usually charges it all at once each month. For short-term overdrafts, they might charge interest sooner.
4. To get an overdraft, you usually need to ask the bank for it in writing. Sometimes, they might also ask you to sign a paper saying you'll pay back the money.

Points To Remember

Every person interested in utilizing cash credit or overdraft facilities for personal or business purposes should acquaint themselves with the subsequent terms and aspects:

Processing Fee: The sum of money that each lending institution charges for handling an application for an overdraft or cash credit is known as the "processing fee." Regarding cash credit, various banks impose varying amounts of processing fees.

Utilization of Loan Amount: The cash credit limit is determined by the hypothecation of shares. But after a certain amount of time, a few of banks charge an extra fee on the loan's unused balance.

Foreclosure Fee: Should the borrower choose to terminate the loan, several lenders will assess foreclosure fees. In addition, they charge a certain portion of the loan amount when the debt account is closed.

Difference Between Cash Credit and Overdraft

Conclusion

To sum up, people and businesses need to understand the differences between cash credit and overdrafts. Cash credit is a short-term loan mostly for businesses, while overdrafts let individuals and businesses take out more money than they have in their accounts within certain limits.

Both have their features and uses, and borrowers should know about things like processing fees and how the loans are used. Knowing about these financial options helps people make smart choices based on what they need.