Cash Credit vs. Overdraft: Know the Difference
By Shumaila Saeed || Published on January 31, 2024
Cash Credit is a short-term credit facility against collateral, allowing withdrawal up to a set limit, whereas Overdraft is a facility allowing account holders to withdraw more than their account balance.
Key Differences
Cash Credit is a type of short-term loan or credit facility extended by banks to businesses, allowing them to withdraw funds beyond their account balance, up to a specified limit, and is generally secured by collateral. Overdraft, on the other hand, is a credit facility extended to individuals or businesses, permitting the withdrawal of funds from their bank account even when the account balance falls below zero, up to a pre-approved limit.
Shumaila Saeed
Jan 31, 2024
The Cash Credit facility is mainly used by businesses to meet their working capital requirements and is typically secured against inventory or accounts receivables. Conversely, Overdraft facilities are often used by individuals or businesses for short-term financial needs and may not always require collateral, depending on the relationship with the bank and creditworthiness.
Shumaila Saeed
Jan 31, 2024
In terms of interest, Cash Credit accounts usually have a lower interest rate compared to Overdrafts due to the collateral involved. Interest on Overdrafts is typically higher and is charged only on the overdrawn amount and for the period it is overdrawn.
Shumaila Saeed
Jan 31, 2024
The Cash Credit limit is generally higher and based on the value of the collateral, whereas the Overdraft limit is usually lower, based more on the account holder’s credit history and relationship with the bank.
Shumaila Saeed
Jan 31, 2024
To summarize, Cash Credit is a secured, higher-limit credit facility for businesses to manage working capital, while an Overdraft is an unsecured, flexible credit facility for individuals or businesses to cover short-term cash shortfalls.
Shumaila Saeed
Jan 31, 2024
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Comparison Chart
Purpose
Meet business working capital needs
Cover short-term cash shortfalls
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Jan 31, 2024
Interest Rate
Generally lower due to collateral
Higher, charged on overdrawn amount
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Jan 31, 2024
Credit Limit
Based on value of collateral
Based on credit history and bank relationship
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Jan 31, 2024
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Cash Credit and Overdraft Definitions
Cash Credit
Cash Credit has a pre-set borrowing limit.
We have a substantial cash credit limit based on our inventory value.
Shumaila Saeed
Jan 08, 2024
Overdraft
Overdraft is a facility allowing withdrawal more than the account balance.
I used my overdraft to cover unexpected expenses this month.
Shumaila Saeed
Jan 08, 2024
Cash Credit
Cash Credit is secured against company assets.
Our cash credit is secured against our accounts receivables.
Shumaila Saeed
Jan 08, 2024
Overdraft
Overdraft can be unsecured, based on creditworthiness.
The bank granted me an overdraft based on my good credit history.
Shumaila Saeed
Jan 08, 2024
Cash Credit
Cash Credit is used for working capital requirements.
The business used cash credit to fund its daily operations.
Shumaila Saeed
Jan 08, 2024
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Overdraft
Overdraft limit is often lower than cash credit.
My overdraft limit is adequate for small, unforeseen expenses.
Shumaila Saeed
Jan 08, 2024
Cash Credit
Cash Credit is a bank-provided secured credit facility for businesses.
The company utilized its cash credit facility to purchase additional inventory.
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Jan 08, 2024
Cash Credit
Cash Credit allows withdrawal beyond the account balance.
Thanks to cash credit, we managed our cash flow during the off-season.
Shumaila Saeed
Jan 08, 2024
Overdraft
A current of air made to pass over the ignited fuel in a furnace.
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Jan 06, 2024
Overdraft
A series of flues in a brick kiln designed to force air down from the top.
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Jan 06, 2024
Overdraft
(countable) The maximum amount that may be overdrawn.
The bank have given me an overdraft of $2000.
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Jan 06, 2024
Overdraft
The extraction of groundwater from an aquifer beyond the safe yield or equilibrium yield.
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Jan 06, 2024
Overdraft
A series of flues in a furnace; the current of air forced through them.
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Jan 06, 2024
Overdraft
(transitive) To extract groundwater from (an aquifer) beyond the safe yield or equilibrium yield.
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Jan 06, 2024
Overdraft
The act of overdrawing; a draft in excess of the credit balance; also, the amount or sum overdrawn.
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Jan 06, 2024
Overdraft
Overdraft is suitable for short-term financial needs.
The overdraft helped me manage until my next paycheck.
Shumaila Saeed
Jan 08, 2024
Overdraft
Overdraft charges interest only on the overdrawn amount.
Interest on my overdraft was calculated on the amount I used.
Shumaila Saeed
Jan 08, 2024
Repeatedly Asked Queries
What is an Overdraft?
A facility allowing account holders to withdraw more than their balance.
Shumaila Saeed
Jan 31, 2024
Who typically uses Cash Credit?
Mainly used by businesses for working capital.
Shumaila Saeed
Jan 31, 2024
Can individuals use Overdraft?
Yes, both individuals and businesses can use it.
Shumaila Saeed
Jan 31, 2024
What is Cash Credit?
A secured credit facility for businesses to borrow against collateral.
Shumaila Saeed
Jan 31, 2024
Is collateral required for Cash Credit?
Yes, it's usually secured against assets.
Shumaila Saeed
Jan 31, 2024
How is interest calculated on Cash Credit?
On the amount withdrawn, up to the limit of the credit.
Shumaila Saeed
Jan 31, 2024
Can Cash Credit limit be increased?
It can be, subject to the value of the collateral.
Shumaila Saeed
Jan 31, 2024
How long can I use Cash Credit?
It's typically a revolving facility, used as needed.
Shumaila Saeed
Jan 31, 2024
Do I need collateral for an Overdraft?
Not always, it often depends on your creditworthiness.
Shumaila Saeed
Jan 31, 2024
Are there fees associated with Cash Credit?
Yes, there can be fees and interest charges.
Shumaila Saeed
Jan 31, 2024
Can startups get Cash Credit?
Yes, if they can provide adequate collateral.
Shumaila Saeed
Jan 31, 2024
How is Overdraft interest calculated?
Only on the overdrawn amount and for the time it remains overdrawn.
Shumaila Saeed
Jan 31, 2024
Can I use Cash Credit for personal expenses?
It's generally intended for business use only.
Shumaila Saeed
Jan 31, 2024
Can Overdraft affect my credit score?
Excessive use or non-payment can impact your credit score.
Shumaila Saeed
Jan 31, 2024
What’s a key benefit of Overdraft?
Offers immediate short-term funds without the need for collateral.
Shumaila Saeed
Jan 31, 2024
Is Overdraft suitable for emergency expenses?
Yes, it's ideal for unexpected, short-term cash needs.
Shumaila Saeed
Jan 31, 2024
Is Overdraft a long-term borrowing option?
No, it's meant for short-term financial needs.
Shumaila Saeed
Jan 31, 2024
What happens if I exceed my Overdraft limit?
Banks may charge fees or higher interest rates for exceeding the limit.
Shumaila Saeed
Jan 31, 2024
What’s the main advantage of Cash Credit?
Provides flexible working capital with potentially lower interest rates.
Shumaila Saeed
Jan 31, 2024
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About Author
Written by
Shumaila SaeedShumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.
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