Difference between Cash Credit and Overdraft

Cash Credit, on the other hand, is something slightly different. It refers to a type of loan that the bank provides to the business or the business owner. Like nearly all loans the bank does ask for collateral in return, in case the person will not be able to pay back the loan. The collateral can be stock, raw materials, or other tangible assets. The limit of the cash credit is calculated on the basis of the business’s working capital. The cash credit is allotted primarily for the purchase of raw materials or current assets.

This cash credit is usually held in a cash credit account, which is similar in nature to a current account. The account holder can withdraw the amount that he needs via the use of a check book. The interest would then be charged on the basis of the amount withdrawn. Once the person deposits the withdrawn amount, the interest will cease to be applicable, until the next time the owner withdraws the amount.

The main difference between Cash Credit and Overdraft is that overdraft is extended on an existing bank account with the bank or lending institution, whereas cash credit is a completely separate facility that must be applied for individually.

Additionally, overdrafts are generally available for regular account holders, as well as for businesses, whereas cash credit is primarily for businesses and business holders. Also, overdrafts are intended for use once in a while or as per need, whereas cash credit is intended for use frequently and regularly.

Comparison between Cash Credit and Overdraft:

	Cash Credit	Overdraft
Field	Business and finance	Business and finance
Type	Short-term cash loans	Short-term cash loans
Description	Loan offered to businesses to continue running when funds are low	Short term loam of cash when it is immediately required.
Purpose	For purchase of raw materials or current assets	Not defined
Limit	Usually higher	Usually lower
Limit Calculation	On the basis of the business’s working capital, as well as other tangible assets such as stock, raw materials, etc.	On the basis of the business holder’s previous bank balances, fixed deposits, and other assets
Interest	Usually lower	Usually higher
For	Businesses and business holders	For individuals, as well as for businesses and business holders

Reference: Wikipedia (Cash Credit and Overdraft), Investopedia, eFinanceManagement, Banking School, TaxAdda Image Courtesy: investopedia.com, pmjandhanyojana.co.in

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