Difference between Cash Credit and Overdraft?

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Businesses need funds to shape their plans into reality. Without funds, no business can expand their operations and grow. Indeed, the lack of adequate cash flow is one of the main reasons for business failures. This is because the businesses need to invest in the expenses of growth, raw materials, marketing and other stock related things. If they fail to manage funds for this, the business may gradually decline. A business loan can be a solution to this. Among the various types of bank loans for business, Cash credit, and Overdraft facility are the credit options that the banks offer for their customers.

Cash Credit

Cash credit is a type of business loan meant for entrepreneurs. It is a short-term financial solution, and business owners mainly opt for this loan when they need quick working capital. Cash credit is primarily used for purchasing the raw materials and maintain the stocks. This loan is mainly offered to businesses. The interest will be calculated on the entire amount you withdraw. To avail this loan, you need to open a separate bank account. Also, the borrower must provide security to avail the loan. The limit of the withdrawal changes, depending on the value or the quantities of stocks. You can get up to 60% of the value of your stocks and receipts as the loan amount. This loan ensures that you receive the working capital quickly with minimum documentation. The facility is free, and the interest rates are lower than overdraft facility, which is an added advantage.

Eligibility- Most of the lenders provide the loan for the business owners who have crossed 25 years of age. Still, the criteria may vary from bank to bank. Some lenders may ask you to submit the IT returns for one year with the application. You must also submit the financial documents, Bank statements, proof of your collateral and other documents as requested by the banks.

Overdraft Facility

In contrast to Cash credit, an Overdraft Facility is long-term financial assistance. The loan is mainly used to keep the business operational, not for purchasing raw materials. This can be used for non – business purposes as well. In the overdraft facility, an entrepreneur can withdraw money even if the account balance is zero. The interest rate is only calculated on the used amount, which is a significant advantage for the borrowers. In this type of loan, the lenders decide on the loan amount depending on the current account balances. Also, you need not open a separate account to avail the loan. The withdrawal limit in the overdraft facility cannot be changed instantly. Overdraft facility is not free. The lender may charge specific fees on the withdrawal amount.

Eligibility- Most of the lenders provide this facility for the owners who crossed 25 years of age. If you are using the loan for individual use, you may have to furnish copies of your salary slips and other bank statements as well.