Difference between Cash Credit and Overdraft

Working capital of the business is essential for running the daily operations, and for that the company needs to take short term loans or long term loans. The popular options in short term loans are cash credit and overdraft and long term loan options are line of credit or business loans, etc.

Cash credit and overdraft are two types of short term loan facilities offered by the lenders to the businesses. Overdraft facility is also offered to individuals based on their relationship with the bank.

Cash credit is referred to as a short term business loan that is offered to businesses for maintaining the working capital, while overdraft facilities are offered to businesses and individuals who wish to withdraw more than their available balance in the bank account.

Following are some points of difference between cash credit and overdraft.

Cash Credit

Overdraft

Definition

Cash credit is a type of short term loan facility that is provided by banks or financial institutions to businesses for maintaining their working capital

Overdraft facility is also a loan facility, which is provided to an individual or a business, based on the relationship with the bank. In this system, an individual can withdraw an amount greater than his available balance till a specified limit as per regulations of the bank

Purpose

For maintaining the working capital of the business, cash credit is offered

Overdraft facility is offered for meeting short term obligations of individuals or businesses

Rate of Interest

Rate of Interest is comparatively lower than overdraft

Rate of interest is higher than the cash credit

Need of account

New account needs to be opened

Overdraft can be availed from an existing account

Calculation of Interest

Calculated based on the entire amount that is withdrawn

Calculated based on only the amount that is availed

Duration of loan

The loan duration is generally 1 year

The loan duration can vary and it can be monthly, quarterly, half yearly or yearly

This article was all about the topic of Difference between Cash Credit and Overdraft, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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