Similarity and Difference between Cash Credit and Overdraft
Cash Credit is a type of business loan provided by the banks in which, a company can withdraw more amount than what he holds to his credit against the security of stock.
Bank Overdraft is a type of business loan, in which the bank allows the customer to withdraw the amount below zero balance but only up to a specified limit.
Some similarities between both types of business loan are as under:
- Both CC limit and OD limit are repayable on demand
- In both cases, the excess money can be withdrawn than available in the account
- Both may be provided against the security of current assets
- Both may also be provided against the security of immovable property [ Loan Against Property]
- In both cases, a limit is fixed beyond which money cannot be withdrawn
Some differences between both types of loan are as under:
Some of the differences between cash credit (CC limit) and overdraft facility (OD) are as under:
- In cash credit, the bank provides the withdrawing facility to withdraw more amount than what customer holds to his credit against hypothecation of stock or any other collateral security. Also, the maximum amount which can be withdrawn is lower of drawing power or sanctioned limit. In OD limit; bank provides withdrawing facility of more than what He has in his current account up to a specified limit. Therefore, customer can withdraw money even if there is a negative balance or zero balance in his account.
- CC limit is given against the security of stock and book debts or collateral security. OD is generally given against security of property i.e Loan against property. OD may also be granted against other securities like fixed deposits, life insurance policies, shares, bonds, NSCs, Kisan Vikas Patra, Indira Vikas Patra, etc. Therefore, in case of OD, besides loan against property, other assets can also be mortgaged. However, before sanctioning the OD, bank ensures proper margin.
- CC limit are provided to business entities which are engaged in trading or manufacturing activities for meeting the working capital requirement. OD may be availed by both business entities as well as individuals.
- Under CC limit, bank issue a cheque book to the borrower for withdrawing money against amount of loan sanctioned. Cheque book is issued to the borrower for withdrawal of money against the limit sanctioned. The withdrawals are permitted to the extent, lower of drawing power or sanctioned limit. This is a revolving facility and is, generally, reviewed and renewed annually or on other intervals as per the policy of the bank. The Bank based on the credit assessment of the borrower performs periodical review of the borrower.
- Rate of interest of CC limit is generally less than rate of interest of OD limit.
- For availing CC limit, a borrower needs to open a cash credit account in a bank whereas for availing overdraft facility, the borrower must have a current account with the bank.
Thus, it may be inferred from above that both CC limit and OD limit are popular forms of business loan in India and there is very less difference in documentation and use of both of them. However, the OD limit is a very old form of funding and is more popular amongst business entities.