Business Organizations require the movement of funds for their smooth functioning and in order to meet the entire financial requirement. Individuals have now resorted to short term loan facilities that are cash credit and overdraft facility. Both are credit facilities that are pertaining to credit with a lender. The words credit and over indicate that you can withdraw more funds than usual capacity. Overdraft and cash Credit account is generally considered more or less similar, but yet some differences suffice.
Here are some of the differences highlighted:
Cash Credit limit facility holds a certain bar, the borrower is allowed to appropriate a fixed sum of money, whereas in Overdraft Facility the customer is allowed to debt only to a specified limit. The loan is made with the current account. This clarifies one important aspect of Cash Credit an Overdraft facility that they are mid-term loan and short term loan respectively.
The loan amount in case of Cash Credit is withdrawn all at once or when it is required, whereas in Overdraft the borrower is allowed to draw and repay multiple times, with the clause that the amount is never drawn over the limit defined. When we consider Cash Credit, the borrower isn’t required to withdraw the whole sum of money all at once; instead he has the liberty to withdraw as and when required. An overdraft can only be withdrawn in circumstances where the borrower requires lending more money than available in the account.
Cash Credit is offered against speculation of goods, on the other hand, Overdraft Facility is offered against securities. For current account holders there exists a limit for the overdraft amount which is agreed upon, whereas, cash credit is borrowed for only a certain limit which is based on the need of the customer. The cash credit is broadly divided into 2 subcategories, Key Cash credit, and Open Cash Credit. Key Cash Credit is the facility in which the borrower keeps the goods in possession of the lender. The key to the room with the products is handed over to the borrower, hence the name. Open Cash Credit facility doesn’t require the borrower to hand over any product to the lender. The overdraft facility is divided into two types, i.e. Secured and Clean Overdraft. In overdraft facility for business some security is involved, this is called secure overdraft whereas the one with no security involved is called clean overdraft.
Important points to keep in mind while opting for CC or OD facility.
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- Processing fees– The bank usually charges a fixed amount which is about .5% to .75%.
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- Interest Rate- The rate is higher the generally fixed loans, for instance, LAP, hence, if you don’t have extra bucks to spare then you must go for LAP.
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- Account shutting charge- Some banks impose charges on the CC and OD account if not used up to a certain limit.
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- Minimum usage clause- Some banks charge you for not using CC or OD account. For instance, for an OD account of 10 Lakhs with an average use of less than 30%, INR 3 lakh is levied.
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- Interest Servicing- Some customers are required to deposit the interest in cash or Cheque deposit.
An entrepreneur who wishes to set up his dream business is compelled to take a loan. You can either go for long term funding like LAP or go for flexible funding like Cash Credit and Overdraft. Funding for the long term is generally carried out at a lower interest rate whereas the flexibility funding provides the opportunity of saving some extra funds and thereby paying an interest amount for only the particular amount required.