Cash Credit is a short-term loan given to businesses and companies. These loans help clients meet their daily operating expenses. It can be used to cover urgent payments related to current assets, selling costs, etc.
Features of Cash Credit
Being a short-term loan, a Cash Credit has to be repaid within 12 months.
There is a borrowing limit that can’t be crossed. It is decided by the client’s ability to repay.
Minimal commitment fees are applied, irrespective of the way the loan is being used.
It can be availed against assets such as stocks or fixed assets.
What is an Overdraft?
An Overdraft is a short-term loan given to existing customers. Overdrafts permit current account holders to withdraw or issue cheques despite low or even negative balances up to a certain limit. These funds can be used to tackle short-term instant payments.
Features of Overdraft
The client can continue with transactions even if their balance falls short.
Banks charge some fees when the accounts are overdrawn.
Some banks offer a protective Overdraft to avoid fines if the client’s account goes down to zero.
It offers instant access to extra credit without paperwork.
Differences between Cash Credit and Overdraft
The rate of interest of an Overdraft is higher than that of a Cash Credit. Thus, it is a little more expensive.
A client doesn’t need any guarantee for an Overdraft. Their credit history is enough.
Cash Credits are only for business purposes. Overdrafts cover general needs, even on a personal level.
An Overdraft is a document-free process. It can even be availed on existing accounts. A cash credit, however, needs a new account.
The period of an Overdraft loan may be monthly, quarterly, semi-annually or yearly. For Cash Credits, it is usually 1 year.
Cash Credit and Overdraft are considered to be the two most vital financial tools to meet the short-term, as well as long-term requirements of an individual or company. Both of these products look quite similar and still are differentiated in various financial aspects. Cash Credit and Overdraft are considered to be popular types of business loans wherein minimum documentation is required.
