Cash credit and overdraft are two types of short-term borrowing facilities that are provided by banks to businesses and individuals. Both cash credit and overdraft allow borrowers to borrow money up to a certain limit, and the borrowed amount is repaid with interest. However, there are some key differences between the two:
- Purpose: Cash credit is a borrowing facility that is typically used for working capital purposes, such as financing the purchase of raw materials or paying for ongoing expenses. On the other hand, an overdraft is a borrowing facility that is used to meet unexpected or emergency financial needs, such as covering an unexpected expense or making a payment when the borrower doesn’t have sufficient funds in their account.
- Limit: Cash credit is typically provided with a specific limit, and the borrower can borrow up to that limit as long as they have collateral to secure the loan. Overdraft, on the other hand, is typically linked to the borrower’s account, and the borrower can borrow up to a certain limit beyond their account balance.
- Interest: Cash credit is generally provided at a lower interest rate than an overdraft, as it is used for financing regular business activities. Overdraft, on the other hand, is provided at a higher interest rate as it is used for meeting unexpected or emergency financial needs.
- Repayment: Cash credit is typically repaid in installments, while overdraft is typically repaid on demand or as soon as the borrower has sufficient funds in their account to cover the borrowed amount.
Overall, cash credit and overdraft are both useful borrowing facilities that can help businesses and individuals meet their short-term financial needs. However, it is important for borrowers to carefully consider their financial needs and choose the borrowing facility that is most suitable for their situation.