What is the difference between Cash Credit and Overdraft?

Cash credit is a short-term business loan. It is meant for entrepreneurs wanting to get quick working capital. An overdraft facility, on the other hand, is long-term financial assistance. It lets you withdraw money from your account even with a zero balance.

Both are generally referred to as credit facilities banks or lenders offer borrowers. Your lender uses the hypothecation of the company’s inventories for the purpose. Certain financial institutions even consider bank statements.

Cash credit and overdraft facilities may appear similar at a glance. However, the two are entirely different financial products. Here are some of the factors that set the two apart:

Eligibility requirements and documentation

Cash credits

Features of cash credit facilities may vary based on the lender you choose. However, here is an overview of its general eligibility requirements.

• Age restrictions: It is 25 for almost all lenders. Contact your lender to know more about it.
• Years of business experience: This also varies based on the lender you approach. The general recommendation is three years.
• Certain lenders require that you have filed IT returns at least for one year. You will have to submit them along with your loan application.
• Proprietorships, partnerships, limited liabilities and publicly traded firms can apply for a working capital loan. Certain lenders even have restrictions on the type of companies that can apply for cash credit.
• You should submit collateral to avail cash credit facility. Almost all lenders accept real estate for the purpose. You may even use your company assets for it.

Documents you need

• Chartered account-certified financial statements
• Bank statements for six months
• Income tax returns of one year
• Proof of your collateral
• Records of your loan repayment (if applicable)
• Other documents your lender may request

Overdraft Facility

Eligibility requirements

You should fulfill the following requirements to avail of a personal loan overdraft facility:

• Above 25 years of age
• A monthly income of at least INR35000
• Should be in the same job at least for six months
• Should have at least two years of work experience

Documents required

• The copies of your salary slips of three months
• Proof of income; bank statements for three months
• ID proof
• Proof of your residence

Advantages

How to Apply

Whatever your choice of loan, you can apply either offline or online. Almost all lenders encourage online applications. Visit the financial institution’s official portal. Fill up the application form; done. Your choice company may contact you on the phone. And a professional will help you through the entire process. You may also visit the lender in person and apply for the same.

Points to remember

You may take either cash credit or overdraft as per your requirements. Whatever your choice, keep the following pointers in mind:

• Know your requirements: Do you really need a loan? Don’t burden your finances with impulsive buying. Stay away from the temptation to buy something big during festivities.
• Do your due diligence: Do thorough research on the market. Evaluate all available options. As you know, information is at your fingertips today. Get the most out of it. Make sure that you are researching well on the factors like repayment tenure. Doing this ensures you get the loan with the lowest interest rate available.
• Borrow within your limit: Lending is now a booming industry. Quite naturally, taking a loan is now a breeze. However, make sure that you don’t borrow more than you can afford. Calculate your income and the EMI interest you have to pay. The loan repayment amount should not exceed 15% of your monthly income.
• Read the fine print: Your lender may not reveal the total cost of your loan. But it would be there in the documents you have to sign. Read the terms and conditions. Remember, additional charges add up to the cost of a loan.
• Go for the shortest term possible: The prospect of a long-term loan is definitely appealing. However, it is not suitable for your pocket. For instance, the interest on a short-term loan stands at 58% of the loan amount. It goes up to 128% in a long-term loan. If a long-term loan is a must, increase your EMI payment annually. You can do it along the lines of your increasing monthly income.
• Maintain a good credit score: This applies specifically to those availing of short-term overdraft facilities. Here, the bank evaluates your credit score when determining your loan amount. This may not apply to those availing of a long-term loan with collateral.
• Be mindful of the processing fee: This varies from lender to lender. Inquire it before taking that final step.

Finally, don’t forget to check the loan utilization charge. Lenders in general, don’t charge for unused loans. However, certain financial institutions charge for it after a specified time limit. And inquire about foreclosure charges. Here too, the lender you choose takes the final decision.

Cash credit and overdrafts are the much sought-after financial products in India. These are easy to avail and need only minimum paperwork. For a diligent entrepreneurs, these are the easiest ways to expand their business.

What is the difference between Cash Credit and Overdraft FAQs: