Managing working capital is a juggling act for any business. Whether you’re running a startup or a seasoned enterprise, short-term financial hiccups are inevitable. Enter cash credit and overdraft facilities—two handy tools to keep your business afloat. But what sets them apart? Let’s break it down in an interactive, no-fuss way.
What is cash credit?
Think of cash credit as your business’s financial safety net. It’s a short-term loan from the bank, where funds are borrowed against collateral like inventory or receivables. This revolving credit line keeps your working capital woes at bay.
Features of cash credit:
- #Revolving credit: Withdraw, repay, and repeat within the approved limit.
- #Interest on usage: Pay interest only on the amount you actually use.
- #Collateral-based: Secured by assets like inventory or receivables.
- #Flexible repayment: Repay as your cash flow allows.
When to use it?
- #Seasonal businesses juggling off-peak expenses.
- #Manufacturers covering delayed client payments.
- #Exporters bridging gaps in international receivables.
What is an overdraft?
Picture this: your bank account balance hits zero, but you still need funds. That’s where overdraft steps in. It lets you withdraw more than your account balance—up to a pre-set limit. Perfect for short-term cash crunches!
Features of overdraft facilities:
- #Flexibility: Dip into funds as needed, up to the limit.
- #Interest on overdrawn amount: Only pay for what you use.
- #Secured or unsecured: Backed by collateral or your creditworthiness.
- #Quick repayment: Ideal for immediate needs you can repay swiftly.
Who benefits?
- #Individuals needing urgent funds.
- #Businesses handling surprise expenses.
Cash Credit vs Overdraft: Key Differences
Here’s a quick comparison to make things crystal clear:
| Feature | Cash Credit | Overdraft |
| Purpose | Business working capital | Short-term financial needs |
| Collateral | Secured by business assets | Secured or unsecured |
| Interest Calculation | On the utilised amount | On the overdrawn amount |
| Repayment | Flexible, based on cash flow | Short-term, quick repayment |
| Beneficiaries | Businesses | Both individuals and businesses |
When to Choose Cash Credit vs Overdraft?
Cash credit is your go-to for:
- #Managing business inventory or receivables.
- #Long-term working capital needs.
- #Leveraging collateral for better terms.
Overdraft works best for:
- #Short-term, immediate expenses.
- #Situations where collateral isn’t available.
- #Individuals seeking quick financial solutions.
Application Process: Cash Credit vs Overdraft
Cash Credit:
- #Requires detailed financial statements, collateral, and business plans.
- #Involves thorough bank assessment.
- #Longer approval process but ideal for larger needs.
Overdraft:
- #Simplified documentation, especially for unsecured options.
- #Quick approval, especially for existing bank customers.
- #Suitable for urgent requirements.
FAQs
1. Can individuals avail of cash credit?
No, it is designed for businesses. Individuals typically rely on overdraft facilities.
2. Are there usage restrictions?
Yes, cash credit is for business working capital needs, while overdraft offers broader usage flexibility.
3. Can limits be increased?
Yes, both limits can grow with your creditworthiness and financial stability.