Understanding The Difference Between Cash Credit and Overdraft

Understanding The Difference Between Cash Credit and Overdraft

To aid the working capital requirements of the new and existing firms, lending institutions offer quick credit forms like overdraft and cash credit. These small business loans offer substantial financial backup for a short tenor to support the urgent requirements.

Though these credit forms seem similar, there are differences in the way they operate. Here is a detailed explanation of the overdraft vs cash credit facilities.

What are the differences between an overdraft vs cash credit?

The difference between overdraft and cash credit is very subtle and relates to the account operation.

Purpose

Cash credit- It is a form of micro credit facility extended by lending institutions that allow individuals to utilize the fund without maintaining a credit balance in their account. This financial aid is offered to support the business operation and working capital flow.

Overdraft– An overdraft is extended to business owners or individuals needing immediate funds. This facility allows individuals to withdraw funds from the pr-sanctioned amount as per convenience till the tenor ends.

Duration

Cash credit– The tenor of this credit form is usually short.

Overdraft– Here, the tenor is longer, depending on the agreement made with the lending institutions.

End-use

Cash credit– Individuals can use these working capital loans to strengthen their business or maintain the cash flow. For instance, an individual can use the fund to restock inventories, pay salaries, storage and warehouse maintenance, finance sales, etc.

Also Read: Everything You Need To Know About Credit Card Interest Rates

Overdraft– Finances sanctioned against overdraft facilities are flexible in usage. It can be used for both business and personal expenses.

Borrowing limit

Cash credit– The loan amount is based on the stock volume and inventory. This amount can be changed by showing the quantity or value of inventories.

Overdraft– Here, the loan amount is based on the financial statements and security deposits. A lending institution decides the credit limit based on credibility and fund usage.

Interest rate

Cash credit– The interest calculation on cash credit is done on the total amount sanctioned by the lender.

Overdraft– Interest in an overdraft facility is levied only on the amount withdrawn, not on the total amount sanctioned.

These are the basic overdraft vs cash credit differences that a business owner must check before availing a loan. This will aid them in making an informed decision regarding the financial source to support the big-ticket expenses. However, if available funds don’t suffice expenses, individuals can look for alternatives like a business loan.

This loan variant extends substantial funds to borrowers against simple eligibility and documentation. Some of its prominent features are discussed below.

What are the features of a business loan?

Needs no collateral

A business loan extends considerable funds without collateral that can be used for big-ticket spending. Entrepreneurs can use this unsecured credit to finance business operations like stocking up inventory, office renovation, business expansion, upgrade technology, and more.

Simple eligibility

Lenders set eligibility parameters to reaffirm an applicant’s repayment capability. The eligibility criteria against business loans are simple and easy to fulfill. Some common parameters include-

  • The applicant must fall in the age bracket of 24 to 70 years
  • An individual should maintain a business vintage of at least three years
  • They must maintain a CIBIL score of 685 or more.

Minimal documentation

Potential applicants need to submit certain documents specified by preferred lenders. Some common papers that are required to be submitted are-

  • Identity proof, such as KYC papers
  • Address proof
  • Documents proving business ownership like Memorandum of Association, business registration, partnership deed, etc.
  • Financial papers, such as ITR, statements from a financial institution for the last six months, etc.

Apart from the mentioned features, many financial institutions also extend hassle-free business loan approval within 24 hours. For instance, reputed financers like Bajaj Finserv extend pre-approved offers to simplify and quicken a loan application.

These offers are available on financial products like personal loans, business loans,  etc. Check your pre-approved offers by entering your name and contact information.

These are some financial sources available for a business owner who needs backup to meet urgent expenses. In terms of short-term funding, they can compare the pointers under overdraft vs cash credit facilities. This will help them make an informed borrowing decision.

However, if credit availability doesn’t suffice with spendings, one can check alternatives like a business loan.

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