How Does Cash Credit Differ from an Overdraft Facility

1. How Does Cash Credit Differ from an Overdraft Facility?

2. For many business owners and individuals, short-term financing options are essential to manage working capital and unexpected expenses. However, people often get confused when it comes to understanding what is the difference between cash credit and overdraft. While both provide access to funds beyond the account balance, they serve different purposes, come with unique eligibility criteria, and are used in different financial situations.

3. What Is Cash Credit? Cash credit is a short-term loan facility usually provided to businesses for managing working capital needs. It is given against security such as stock, receivables, or other assets. Borrowers can withdraw money up to a sanctioned limit and are charged interest only on the utilised amount. Cash credit helps businesses maintain liquidity by financing daily operations like purchasing raw materials, paying wages, or covering other running expenses. What Is an Overdraft Facility? An overdraft facility, on the other hand, is linked to an individual’s or company’s bank account. It gives the account holder a chance to withdraw more money than the available balance, up to a pre-approved limit. The overdraft can be secured against fixed deposits, property, or even offered as a clean overdraft depending on the relationship with the bank. Interest is charged only on the amount withdrawn and for the period it is used, making it flexible for meeting short-term or emergency requirements.

4. Key Differences • Purpose – Cash credit is mainly for business working capital, whereas overdraft can be used for both personal and business needs. • Security – Cash credit typically requires collateral like inventory, while overdraft may be secured or unsecured. • Limit – Cash credit limits are generally higher than overdraft limits, making them more suitable for large- scale operations. • Account Linkage – Cash credit is a separate loan account, while overdraft is linked directly to a current or savings account.

5. Conclusion Both cash credit and overdraft facilities provide flexible borrowing options, but their usage depends on the borrower’s requirements and financial profile. Businesses that need continuous working capital support usually benefit from cash credit, while overdrafts are better suited for short-term personal or business emergencies. For individuals looking for additional flexibility, exploring a personal loan overdraft can be a smart option, combining the advantages of a personal loan with the convenience of overdraft access.