Cash Credit vs Overdraft 

What is Cash Credit?

Cash Credit is a short-term loan given to businesses and companies. These loans help clients meet their daily operating expenses. It can be used to cover urgent payments related to current assets, selling costs, etc.

Features of Cash Credit

• Being a short-term loan, a Cash Credit has to be repaid within 12 months.
• There is a borrowing limit that can’t be crossed. It is decided by the client's ability to repay.
• Minimal commitment fees are applied, irrespective of the way the loan is being used.
• It can be availed against assets such as stocks or fixed assets.

What is an Overdraft?

An Overdraft is a short-term loan given to existing customers. Overdrafts permit current account holders to withdraw or issue cheques despite low or even negative balances up to a certain limit. These funds can be used to tackle short-term instant payments.

Features of Overdraft

• The client can continue with transactions even if their balance falls short.
• Banks charge some fees when the accounts are overdrawn.
• Some banks offer a protective Overdraft to avoid fines if the client's account goes down to zero.
• It offers instant access to extra credit without paperwork.

Differences between Cash Credit and Overdraft

• The rate of interest of an Overdraft is higher than that of a Cash Credit. Thus, it is a little more expensive.
• A client doesn't need any guarantee for an Overdraft. Their credit history is enough.
• Cash Credits are only for business purposes. Overdrafts cover general needs, even on a personal level.
• An Overdraft is a document-free process. It can even be availed on existing accounts. A cash credit, however, needs a new account.
• The period of an Overdraft loan may be monthly, quarterly, semi-annually or yearly. For Cash Credits, it is usually 1 year.

Bottom Line

It is essential to be cautious when taking a short-term loan. One should compare the interest rates offered by different banks and choose the one that suits their needs and budget the most. It is also important to read and understand the terms and conditions set by the bank. One should learn about the processing charges to have a better idea of the total cost of the loan and make an informed decision.

This choice can come along with a lot of confusion. Federal Bank is here to make the experience less unnerving. Big business goals and dreams can now become a reality! Federal Bank's Business Loans can help make business dreams come true. One can get a loan that's customised to fit the business needs, via a hassle-free application process.