Difference between cash credit and overdraft

Cash credit is a short-term loan provided by financial institutions to entrepreneurs to manage their working capital requirements. On the other hand, an overdraft is long-term financial assistance offered by banks to corporate entities for withdrawing cash from their account even with zero balance. Both cash credit and overdraft are utilized to block unnecessary check bounce and decline of debit cards owing to inadequate funds in their accounts.

Features of cash credit and overdraft

• Cash credit and overdrafts are credit limits authorized by concerned banks or lenders. These financial instruments are leveraged to redeem money against financial statements.
• One of the major differences between cash credit and overdraft is how they are secured.

Even though both are funding products, there are slight differences between cash credit and overdraft as two financial instruments:–

Working of cash credits

Cash credit is provided to business organizations instead of customers. Financial institutions including credit unions and banks demand collateral security in the form of tangible assets and stocks. Cash credit is short-term finance provided to those customers who are struggling to raise funds. They could take advantage of cash credits to carry out day-to-day banking transactions. Interest is charged only on closing balance to that of various credit items.

What are the important points to be taken into consideration while choosing cash credit and overdraft?

• Customers should pay close attention to the processing fees charged by various banks and financial institutions since it fluctuates regularly.
• The rate of interest levied by lenders for cash credit loans is low to that of an overdraft facility.
• Cash credit has a specified limit based on the hypothecation of stocks while other banks levy additional amounts on unutilized loan amounts for a certain period.
• There are quite a few lenders who levy foreclosure charges when the borrower prefers to close the amount. Borrowers are supposed to pay 1% to 2% of the loan amount to close the loan account.

As a result, it is up to the customers to keep track of hidden charges and processing fees levied by the financial institutions before opening a brand new account or leveraging an overdraft facility on an existing account.

Note: — Long term finance involves a lower rate of interest while short term business loan involves a higher rate of interest.

What are the eligibility requirements and supporting documents required?

• Applicants must be twenty-five years of age. If necessary, consult a lender to fetch additional details.
• Applicants must have three years of experience in the respective industry. However, this might vary based upon the criterion set up by lenders.
• Quite a few lenders demand the customers to file IT returns for one year. They are supposed to submit it along with the loan application.
• The working capital loan is accessible only to partnerships, publicly traded entities, partnerships, and limited liabilities. But certain lenders impose restrictions on the nature of the company before applying for a cash credit loan.
• Applicants must submit collateral security in the form of real estate or companies to avail cash credit facility.

Some of the crucial documents required at the time of availing cash credit loan are as follows: —

• Bank statements of the previous six months
• Financial statements duly certified by a chartered accountant
• Income tax returns of the previous year
• Collateral security as proof
• Loan repayment records

Eligibility requirements for availing an overdraft facility

• Applicants should be twenty-five years of age
• They must earn a monthly income of thirty-five thousand.
• Must be working in the same company for six months
• Should have two years of working experience.

Essential documents required to avail an overdraft facility

• Hard copies of salary slips of the previous three months
• Three months Bank statements as proof of income
• Address proof
• ID proof

Related Articles: What is Overdraft Facility

Conclusion:

Both cash credit and overdraft facilities are some of the crucial financial tools to manage long-term and short-term working capital requirements for an individual and company. Even though these two share similar features, there are still slight differences in terms of financial aspects. They are one of the sought-after business loans that require minimum documents.

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