Difference between cash credit and overdraft

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Cash credit is a short-term loan provided by financial institutions to entrepreneurs to manage their working capital requirements. On the other hand, an overdraft is long-term financial assistance offered by banks to corporate entities for withdrawing cash from their account even with zero balance. Both cash credit and overdraft are utilized to block unnecessary check bounce and decline of debit cards owing to inadequate funds in their accounts.

Features of cash credit and overdraft

  • Cash credit and overdrafts are credit limits authorized by concerned banks or lenders. These financial instruments are leveraged to redeem money against financial statements.
  • One of the major differences between cash credit and overdraft is how they are secured.

Even though both are funding products, there are slight differences between cash credit and overdraft as two financial instruments:–


Cash credit


The rate of interest is lower than that of overdraft

  The interest rate is higher

Cash credit is useful in purchasing raw materials, maintain inventory, and handling receivables

Keeping business in operational mode.

Cash credit loan can be procured on hypothecation of inventory and stocks

  An overdraft could be obtained based on insurance policies, investments in the form of fixed deposits, bond with the concerned bank, and the credit history of an individual

Cash credits are meant to satisfy personal requirements

The purpose of overdraft is to meet non-business requirements

  The loan amount is dependent on the availability of inventory and stocks

  In overdraft, the loan amount is based upon the security deposited and financial statements.

The rate of interest is computed based on the whole amount redeemed

  Interest rate is calculated based on the amount utilized

  Cash credit is not subject to a reduction in the long run

Overdraft involves monthly reduction

You are supposed to create a separate account

Overdraft makes use of the current account to leverage the benefits.

  A cash credit loan can be procured for a minimum of one year

  An overdraft can be obtained for a shorter duration say up to one year (maximum)

  The maximum loan amount provided is based upon the value of stocks and receipts.

  The concerned lender has the liberty to fix an amount based on account and bond with the bank

   Cash credit loans are granted only to sole proprietorship, companies, individuals, partnerships, traders, manufacturers, and LLP.

  Only account holders have access to an overdraft facility

  The withdrawal limit is subject to changes in value and quantity of inventories

  The withdrawal limit cannot be changed

  Cash credit is provided only based on the existing performance of the business and market situation

  On the other hand, an overdraft facility is granted based on the financial statements and credit history of an individual

No additional charges are levied

The concerned lender would decide whether to levy extra charges or not.

Working of cash credits

Cash credit is provided to business organizations instead of customers. Financial institutions including credit unions and banks demand collateral security in the form of tangible assets and stocks. Cash credit is short-term finance provided to those customers who are struggling to raise funds. They could take advantage of cash credits to carry out day-to-day banking transactions. Interest is charged only on closing balance to that of various credit items.


What are the important points to be taken into consideration while choosing cash credit and overdraft?

  • Customers should pay close attention to the processing fees charged by various banks and financial institutions since it fluctuates regularly.
  • The rate of interest levied by lenders for cash credit loans is low to that of an overdraft facility.
  • Cash credit has a specified limit based on the hypothecation of stocks while other banks levy additional amounts on unutilized loan amounts for a certain period.
  • There are quite a few lenders who levy foreclosure charges when the borrower prefers to close the amount. Borrowers are supposed to pay 1% to 2% of the loan amount to close the loan account.

As a result, it is up to the customers to keep track of hidden charges and processing fees levied by the financial institutions before opening a brand new account or leveraging an overdraft facility on an existing account.

Note: — Long term finance involves a lower rate of interest while short term business loan involves a higher rate of interest.

What are the eligibility requirements and supporting documents required?

  • Applicants must be twenty-five years of age. If necessary, consult a lender to fetch additional details.
  • Applicants must have three years of experience in the respective industry. However, this might vary based upon the criterion set up by lenders.
  • Quite a few lenders demand the customers to file IT returns for one year. They are supposed to submit it along with the loan application.
  • The working capital loan is accessible only to partnerships, publicly traded entities, partnerships, and limited liabilities. But certain lenders impose restrictions on the nature of the company before applying for a cash credit loan.
  • Applicants must submit collateral security in the form of real estate or companies to avail cash credit facility.

Some of the crucial documents required at the time of availing cash credit loan are as follows: —

  • Bank statements of the previous six months
  • Financial statements duly certified by a chartered accountant
  • Income tax returns of the previous year
  • Collateral security as proof
  • Loan repayment records

Eligibility requirements for availing an overdraft facility

  • Applicants should be twenty-five years of age
  • They must earn a monthly income of thirty-five thousand.
  • Must be working in the same company for six months
  • Should have two years of working experience.

Essential documents required to avail an overdraft facility

  • Hard copies of salary slips of the previous three months
  • Three months Bank statements as proof of income
  • Address proof
  • ID proof

Related Articles: What is Overdraft Facility


Both cash credit and overdraft facilities are some of the crucial financial tools to manage long-term and short-term working capital requirements for an individual and company. Even though these two share similar features, there are still slight differences in terms of financial aspects. They are one of the sought-after business loans that require minimum documents.

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