Do you have a desire to operate a profitable firm? You need to have enough money to cover your operating costs constantly. Financial firms now offer a range of financing options to help you with your financial needs in case of a cash emergency.
Among the most popular loan packages among these options are overdraft and cash credit loans. Despite the common misconception that these two goods are the same, they are very different from one another. We explain cash credit and overdraft to you in the following part and point out the main distinctions between the two.
A cash credit is a brief-term loan for businesses. It is intended for business owners looking to get immediate working capital. However, an overdraft facility provides ongoing financial support. It permits you to take money out of your account even when there is nothing in it.
Both are often known as credit facilities that lenders or banks provide to debtors. To this end, your lender hypothesizes the company’s inventory. Some financial organizations even consider bank statements.
Important Cash Credit Loan Features
The following are some of its features:
- You need to open a different bank account to get cash credit money.
- Cash credit borrowing may only be used for business-related operations.
- Financial organizations usually require collateral before granting loans for cash credit.
- You can pay back your loan once a week or once a day using this financing option.
- However, cash credit accounts have predetermined guidelines, limitations, and requirements.
- Using transaction numbers and chequebooks for the cash credit account is unrestricted under the terms of this financing agreement.
- You must submit your balance sheet, GST filing, and quarterly and annual profit and loss statements to be eligible for this financing.
A Few Notable Commonalities Between Overdraft Facilities and Cash Credit
You need to be knowledgeable of the similarities and distinctions between a cash credit and an overdraft facility.
- Interest Computation
The lending organization assesses interest according to the amount taken away rather than the amount authorized, irrespective of whether it is an overdraft or a cash credit.
- Max Sum
The maximum sum approved under both financing agreements is set, and you are not eligible for any additional amount.
- Repayment
All forms of funding, including overdraft facilities and cash credit loans, are payable on demand. There are no prepayment penalties associated with these two financing choices.
Cash Credit Versus Overdraft: Important Variations
Overdraft and cash borrowing options could seem alike at first glance. However, the two financial goods are very distinct from one another.
The Following are Some Characteristics that Distinguish the Two:
Cash Credit vs Overdraft
| Feature | Cash Credit | Overdraft |
| Purpose | To assist you with purchasing raw materials, managing receivables, and keeping inventory | To continue the operation of your business. |
| Secondary Purpose | To satisfy non-business needs. | Specific Individual Needs. |
| Calculating Rate of Interest | Based on the total amount that you take out | Depending on how much amount is utilized. |
| General Rate of Interest | Low | High |
| Bank Account | Require opening a different account. | You may use the current account you have to access this feature. |
| Maximum Amount | As much as 60% of the total value of your revenues and inventory. | The lender decides based on your account and your history with the organisation. |
| Limit of Withdrawal | Can be adjusted based on the amount or worth of your inventory. | Unchangeable. Your current balance may impact your current account. |
| Charges | Nil | The lending institution makes the decision. |
Documentation and Eligibility Criteria
Cash credit facilities can have different features depending on the institution you select. Here is a summary of its basic qualifying standards.
Eligibility Criteria for Cash Credit
| Eligibility Criteria | Details |
| Age Limit | For most lenders, that means 25 years. For further information, get in touch with your lender. |
| Business Vintage | Usually advised to have three years or more of experience in the business sector. |
| Income Tax Returns | Specific lenders demand that you submit an ITR file for at least a year. Submission must be made with the loan application. |
| Business Structure | Publicly traded businesses, limited liability companies, partnerships, and proprietorships are all acceptable. Depending on the kind of business, restrictions may apply to some lenders. |
| Collateral Necessary | Submission of collateral is required to receive cash credit. It is customary to accept real estate, but business assets may also be used. |
Required Documents for Cash Credit
| Requirement | Details |
| Financial Statements (Certified) | Financial statements certified by a chartered accountant are necessary. |
| Bank Statements | Bank statements for the last six months must be submitted. |
| ITR | For a minimum of one year, submit income tax returns. |
| Collateral Proof | Collateral must have proof of its existence and worth documented. |
| Loan Reimbursement Record | Records of prior reimbursements for loans should be submitted if needed. |
| Additional Documents | Throughout the application procedure, the financial institution might ask for additional papers. |
Important Things to Keep in Mind about Overdrafts Are:
- Individuals who have a major investment or account with a lender and a solid connection with them are eligible for overdrafts. Because of this, not all individuals may be able to use this facility.
- Financial companies impose fees on you each time you take out more money from your account. The costs differ among lenders.
- When you are holding a joint account, you are still eligible to apply for an overdraft facility. In this instance, both account holders are accountable for repaying the debt.
- Repayment terms for overdrafts differ from those for other types of loans. EMIs are not set up by lenders; payments are due when requested.
Eligibility for Overdraft Facilities
To be eligible for an overdraft facility, you must meet these minimum requirements:
- Over 25 years old;
2. A minimum monthly salary of INR 35,000. - Six months or longer at the same employment
4. Minimum of 2 years of work experience.
Documents Required for Overdraft Facilities
- Copies of the last three months’s paychecks
- Three months’ worth of bank statements
- ID proof
- 4 Proof of Residential Address
Benefits of Overdraft and Cash Credit
| Feature | Cash Credit | Overdraft |
| Primary Benefit | Offers working capital as soon as possible. | Supports in keeping your score high |
| Interest Payment | Interest is only charged on the amount utilized. | Assures loan repayment on schedule |
| Documentation | Quick processing and little documentation. | Minimum paperwork |
| Flexibility | Presents the most flexibility | Less interest expense. |
How do you apply for cash credit or an overdraft facility?
You can apply online or offline for any type of business financing. Applications made online are approved by almost all lenders. Go to the lender’s official website. Complete the application and submit it. You might receive a phone call from your preferred company. You will also receive expert assistance during the entire procedure. You may ask for the same thing in person by going to a financial institution.
Keep in Mind This While Choosing An Overdraft or Cash Credit
You can take out an overdraft or a cash credit, depending on your needs. Whichever option you select, bear these basic suggestions in mind:
- Understand Your Needs:
Do you require a loan? Avoid piling debt on your budget by making rash purchases. Avoid giving in to the urge to purchase a large item during the occasion’s festivities.
- Do Your Due Diligence
Investigate the marketplace in complete detail. Look at each available option. Nowadays, you can easily access details. Maximise its benefits. Make sure you have done adequate research on variables such as repayment duration. By doing this, you can be confident that the loan you receive has the best interest rate possible.
- Borrow No More Than You Can
The lending market is now flourishing. Getting a loan is currently simple. But be careful not to go beyond what you can manage. Figure out what you earn and the interest you must pay on your EMI. The sum owed on your loan shouldn’t exceed more than 15% of what you make every month.
- Check the Fine Print
The total expense of your loan could not be disclosed by your lender. However, it would be included in the paperwork that you must sign. Go over the terms and conditions. Keep in mind that the total cost of a loan includes additional fees.
- Choose the Shortest Term You Can
Undoubtedly, the idea of a long-term loan is alluring. It isn’t, however, affordable for you. For example, the interest charged on a loan with a short duration is equal to 58% of the borrowed amount. If it’s a long-term loan, it increases to 128%. If you really must have a long-term loan, then raise your annual EMI amount. You might plan it in accordance with your rising monthly revenue.
- Keep Your Credit Score High
This is especially important for people who use short-term overdraft credit. In this case, the bank uses your credit score to calculate how much to loan you. Those who take out long-term loans with collateral could not be affected by this.
- 7. Pay Attention to the Processing Charge
Each lender has a different processing charge. Before making that last move, find out. Last but not least, remember to look into the loan usage charge. For unused loans, lenders often don’t charge anything. But after a given amount of time, some banking institutions charge for it. Find out more about foreclosure costs.
The lender of your choice has to have the final word in this matter as well. In India, the most requested financial offerings include overdrafts and cash credit. These are simple to get and require little documentation. These are the simplest strategies for a dedicated business owner to grow his or her business.
Bottom Line
Overdrafts and cash credit financing are helpful financial instruments. These support small firms in meeting their working capital needs. However, take into account the interest rate, processing costs, and other advantages associated with these. Both offerings Before deciding whether to choose an OD or a CC, review everything first.
It’s critical to understand the distinctions between OD and CC. These play a vital role when selecting a credit facility for your business’s needs. Both have special qualities of their own. But you must make a decision based on your company’s demands and financial goals.
CC and OD are useful financial instruments when it comes to helping firms achieve their working capital needs. Despite their apparent similarities, these two goods are not the same. Therefore, before selecting the appropriate product, be sure to comprehend its advantages and any additional costs.