Difference between Overdraft and Cash Credit

Overdraft and cash credit are widely used external sources of finance for availing short term borrowing at some cost. Both cash credit and overdraft are used by businesses to manage short-term working capital requirements. The difference between overdraft and cash credit are on various aspects which include nature of the account, charges, and fees, amount, purpose, type of security, use of funds, interest rate etc. 

Both these facilities are repayable on demand and therefore classified as sources of finance payable on demand or loans payable on demand. However, these facilities are rarely recalled in real-life scenario except in very rare circumstance like customer’s business and financial position is going from bad to worse phase as time passes by or in a case when the value of the security is found extremely low during period re-valuation of the security or during the renewal of the facility.

Although both these facilities are very similar in nature, one needs to understand cash credit vs. overdraft difference in order to understand them better.

Difference between Overdraft and Cash Credit

Overdraft

Cash Credit 

Account requirement

Overdraft can be availed on the existing current account. It is a facility of “excess withdrawal” given in current account and at times even in the savings account. One needs to usually open a separate cash credit account with a bank to avail cash credit facility.

Security Requirement

Overdraft facility does not necessarily require current assets as security. An overdraft facility may be extended by taking shares, other investments like FDs, insurance policies as security. At times even based on the credibility of the person, overdraft limit may be approved. Company inventory and receivables are usually taken as security for allowing cash credit facility.

Limits Sanctioning Rationale

Limit is usually allotted taking into consideration the assets collateralized and also on the basis of financial statements of the company. Limit is usually a percentage of the stocks or receivables.

End Use

Overdraft Facility can be used for any purpose and not necessarily for business. This is generally given specifically for the purpose of the business operation (as working capital).

Length of Credit Period

Overdraft facility is allowed for a very short duration at times (Say a month or even for a week in some cases), but can be allowed for a period of up to 1 year. Cash Credit is usually for a short period. That means, the limit is allowed for a period of 1 year and is renewed every year. In some cases, renewals or review may be stipulated half yearly as well.

Limits Availability

The amount or the overdraft limit that the customer gets remains constant since limits sanctioned is not based on current assets. However, if OD is against shares or insurance policy surrender value, the limit changes based on the underlying security value at periodic intervals. The cash credit withdrawal limit keeps changing with the change in the amount of current assets kept as security. Withdrawal limit from the CC facility is called drawing power.

Rate of Interest

The rate of interest charged under overdraft facility is higher than what is usually charged under the cash credit facility. The rate of interest charged under cash credit facility is lesser than what is usually charged under the overdraft facility.

References:


Last updated on : July 28th, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

Working Capital Calculation – Percentage of Sales …
  • Working Capital Policy – Relaxed, Restricted and Moderate
    Working Capital Policy – Relaxed, Restricted and …
  • Types of Working Capital
    Types of Working Capital
  • Importance of Working Capital Management
    Importance of Working Capital Management
  • Aggressive Approach to Working Capital Financing
    Aggressive Approach to Working Capital Financing
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook


    Related pages


    gdr financepayout ratio definitionresidual dividend policyoperating income formula managerial accountingquick acid test ratio formulaformula for dcflessor or lesseedepreciations methodshypothecation and pledgefluctuating current assetstrue lease vs finance leasedivident covercapital in accounting equationanalysis of inventory turnover ratiodifference between guarantee and standby letter of creditlessor accounting for finance leasescapital gearing ratio formulaa convertible bond has the following featurescapm cost of capitalhow to comment on profitability ratiosbond tenorcurrent liabilities ratio formularatio analysis and interpretationdefine leaseehow do you check your indirects on twittervehicle hypothecationadvantages and disadvantages of stakeholder theoryvariable cost managerial accountingoverdraft facility definitionthe definition of rationingconcept of eoqstandby letter of credit vs bank guaranteeformula of shareholders equityfinancial ratios formulas and explanationsdiscounted cash flow valuation templateis ebitda same as operating incomeinstalment buying definitiondebenture and bondscapital budget evaluation techniquesadvantages of managerial economicsearnings multiplier approachicma accountingadvising bank letter of creditrelative valuation techniquesgurpreet manndebtors account receivableconglomerate companies exampleswhat does accounting equation meanwhat is the formula for irrdefine initial outlayconstant dividend growth formuladiscounting cash flows formularoe du pontbep in unitsreturn on assets ratio analysisformula for debt coverage ratiohorizontal merger examples real lifebreak even point and contribution marginintrinsic value of stock formulaunderstanding debits and credits accountingcurrent cash debt coverage ratio formularetained profits advantages and disadvantagessecured debenturenoi ratioformula of dividend per sharewhat is invoice financingfinancial leverage and operating leveragedetermine payback periodmerits & demeritsexamples of debits and credits in accountingwhy is the capital expenditure budgeting process importantirr methodpvif tablemiller modigliani