Business organizations need funds in order to meet their monetary requirement. Funding provided by banks for this purpose can either be long term or short term. Nowadays individuals/entities choose short term loan facility, in the form of cash credit and overdraft. Cash Credit is a type of facility provided by the bank or financial institution in which, a company can withdraw an amount more than what he holds to his credit against the security of stock.
On the contrary, Bank Overdraft is another facility, in which the bank permits the customer to debit his current account below zero but only up to a specified limit. So, there is always a question, which of the two facilities should be chosen over the other. And for this, one must know the difference between cash credit and overdraft, so take a look at the article and understand the term clearly.
Content: Cash Credit Vs Overdraft
|Basis for Comparison||Cash Credit||Overdraft|
|Meaning||Cash credit is a type of short term loan provided to companies to fulfill their working capital requirement.||Overdraft is a facility given by the bank to companies, to withdraw money "more" than the balance available in their respective accounts.|
|Security||Pledge or hypothecation of inventory.||Assets like financial instrument and property.|
|Account||Cash Credit Account||Current Account|
Definition of Cash Credit (CC)
Cash Credit is a type of short-term loan facility in which the withdrawal of money by the company is not restricted to the amount the borrower holds in his cash credit account but up to a predefined limit.
The cash credit account functions like a current account with cheque book facility. The facility is provided to pledge or hypothecation of stock i.e. raw materials, work in progress, finished goods, etc. or on the guarantee of book debts (debtors) or other collateral security as per banking company norms. The purpose of taking cash credit is to fulfil working capital requirement of the firm. The cash credit limit is supposed to be equal to the working capital requirement of the company less the margin funded by the company itself.
The drawing limit is specified by the bank or financial institution as well as it can vary from bank to bank and borrower to borrower. The bank charges interest on the amount utilised not on the limit sanctioned. The bank has the right to demand money lent at any time.
Definition of Overdraft (OD)
Overdraft means the act of overdrawing money from the bank account. Bank Overdraft is a facility provided by the bank to its customers withdraw money more than the amount he holds in his account.
The overdraft limit sanctioned is predefined by the bank depending upon the securities pledged or repayment capacity of the Account holder. The drawing limit is specified by the bank, or financial institution may vary from bank to bank and borrower to borrower. Interest is charged on the amount utilised not on the limit sanctioned. The amount withdrawn above the specified limit will be subject to additional charges.
The overdraft are repayable on demand i.e. the bank has the right to call the money lent to the customer at short notice. Cheque book is provided to the account holder to operate these account.
When the overdraft facility is provided without any security to meet urgent financial needs, it is known as Clean Overdraft. However, when it is provided against the security of assets like land & building, shares, debentures, etc. it is known as Secured Overdraft.
Key Differences Between Cash Credit (CC) and Overdraft (OD)
The following points are noteworthy so far as the difference between cash credit and bank overdraft is concerned:
- The withdrawing facility provided by the bank in which the person can withdraw amount more than what he holds to his credit, against the hypothecation of stock or any other collateral security is known as a cash credit. Overdraft is another withdrawing facility in which the bank allows the customer to withdraw amount more than more than what he holds to his credit, but only up to a certain extent is known as Overdraft.
- The Cash Credit is divided into two categories, i.e. Key Cash Credit and Open Cash Credit. The Overdraft is divided into two types, i.e. secured overdraft and clean overdraft.
- For availing cash credit facility, the borrower must have a cash credit account with the bank or financial institution. Conversely, Overdraft facility can be availed by the borrower, if he has a current account with the bank.
- Cash credit facility is given against the pledge or hypothecation of inventory or other current assets or collateral security. Overdraft facility is given against the security of fixed assets (if securitised).
- Payable on demand
- Money can be withdrawn more, than the amount available in the account.
- Line of credit
For fulfilling the working capital requirement of the company at the time of ‘need’, the banks provides many facilities. These facilities include cash credit, overdraft, bill discounting and working capital loan, etc. Cash Credit and Overdraft are the popular ones; they are very similar in many aspects. The difference between cash credit and overdraft is quite subtle. But, overdraft is one of the oldest concepts as compared to the cash credit.