Cash Credit and Overdraft Meaning | What is the Difference between Cash Credit and Overdraft | Cash Credit Facility | Overdraft Facility | A short-term business loan is a cash credit. It is designed for business owners who need rapid working funds. On the other hand, long-term financial aid is an overdraft facility. Even having a negative balance, you can still withdraw money from your account.
Cash Credit and Overdraft Explained
In general, both are referred to as credit facilities that banks or lenders provide to borrowers. In order to accomplish this, your lender hypothecates the company’s inventories. Even bank statements are taken into account by some financial institutions.
At first glance, Cash Credit and Overdraft services could look identical. However, the two financial instruments are totally unrelated. Some of the distinctions between the two are as follows:
Difference between Cash Credit and Overdraft
|Purpose||To help you buy raw materials, take care of receivables, and maintain stocks||To keep your business operational|
|Purpose||Individual requirements||To fulfill non-business requirements|
|Calculating rate of interest||Based on the entire amount you withdraw||Based on the amount used|
|General rate of interest||Lower||Higher|
|Bank account||Need to open a separate account||You can use your current account to avail the facility|
|Maximum amount||Up to 60% of the value of your inventories and receipts||The lender decides based on your account and your relationship with the institution|
|Limit of withdrawal||Can be changed based on the value or quantity of your inventories||Cannot be changed. Your current balance may influence your current account|
|Charges||Nil||Your lender decides|
Eligibility Criteria and Supporting Documents
For Cash Credits
- Depending on the lender you select, the features of cash credit facilities may change. Here is a summary of its general eligibility conditions.
- limits on age: For practically all lenders, it is 25. To learn more about it, speak with your lender.
- Years of business experience: This also changes according to the lender you speak with. Three years is generally suggested.
- You must have filed IT returns for at least a year in order to borrow money from some lenders. They must be included with your loan application.
- A working capital loan can be requested by proprietorships, partnerships, limited liability companies, and publicly traded companies. Even the kinds of businesses that are eligible to apply for cash lending are subject to restrictions from some lenders.
- If you want to use the cash credit facility, you must provide collateral. Real estate is accepted as collateral by almost all lenders. You could even use the resources of your business.
- Chartered account-certified financial statements
- Bank statements of 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
For Overdraft Service
To be eligible for a personal loan overdraft facility, you must meet the following requirements:
- older than 25 years old.
- a minimum monthly income of INR 35,000.
- be employed in the same position for at least six months.
- have at least two years of professional experience
- The copies of your salary slip for three months
- Proof of income; bank statements for three months
- ID proof
- Proof of your residence
Advantages of Cash Credit and Overdraft
|Ensures working capital at the earliest||Helps you maintain a good score|
|You pay interest only of the amount used||Ensures timely repayment of loans|
|Minimal documentation and fast processing||Minimum paperwork|
|Offers maximum flexibility||Lower cost of interest|
How to Apply for Cash Credit and Overdraft
You can apply offline or online for any loan of your choosing. Virtually all lenders support online applications. Visit the official website of the financial institution. Fill out the application, then submit it. You might receive phone calls from your preferred business. Additionally, a specialist will assist you at every step of the way. You can also apply for the loan in person by going to the lender.
Things to keep in Mind
Depending on your needs, you can either take out an overdraft or a cash credit. Whatever decision you make, bear the following considerations in mind:
Understand your needs: Do you truly require a loan? Don’t let impulsive purchases strain your budget. Avoid the urge to make a large purchase when celebrating.
Exercise due diligence: Do a thorough market analysis. Consider all of your alternatives. As you are aware, information is readily available today. the most out of it. Be careful to conduct thorough research on aspects like repayment tenure. By doing this, you may be certain that you will receive the loan with the lowest interest rate.
Keep your borrowing to a minimum: The lending market is currently flourishing. Naturally, obtaining a loan is now simple. However, be cautious not to borrow more than you can manage. Determine your income and the required EMI interest payment. 15 percent of your monthly income should not be used for loan repayment.
Check the small print: The exact amount of your loan might not be disclosed by your lender. However, it would be stated in the documents that you must sign. Read the rules and guidelines. Keep in mind that additional fees add to the loan’s cost.
The shortest word is preferable: A long-term loan is obviously enticing as an option.
It is bad for your wallet, though. For instance, a short-term loan’s interest rate is 58 percent of the loan’s principal. In the case of a long-term loan, it rises to 128 percent. If you must take out a long-term loan, increase your EMI payment each year. You can adjust it in accordance with your rising monthly revenue.
Maintain a high credit score: This is especially important for people who use the short-term overdraft facility. Here, the bank considers your credit score when choosing the size of your loan. If you’re getting a long-term loan with collateral, this could not apply to you.
Pay attention to the processing fee: Lenders have different requirements for this. Before you take the next step, ask it.
Last but not least, remember to look at the loan utilization fee. In general, lenders do not levy fees for unused loans. However, after a certain amount of time has passed, some banking institutions charge for it. And find out the costs associated with the foreclosure. The lender you select makes the final call in this situation as well.
The two most sought-after financial products in India are cash credit and overdraft. These are simple to obtain and require little documentation. These are the simplest strategies for a hardworking business owner to grow their enterprise.
Equated Monthly Installment is referred to as EMI. This is the sum that you pay on a specific day to your lender. You continue doing that until your loan is entirely repaid.
Depending on the lender you contact, it varies. The tenure typically ranges from one to five years.
Stamp duties, PF, and insurance are sometimes included in your first payment. Therefore, it is typically higher. Pay these fees out front. Additionally, you will simply be required to pay the EMI in addition to the principle.
You can reach us by phone at the toll-free number or in person.
An EMI calculator can be used for this. Apps made for this purpose are widely available on the Internet.
The lender of your choice will determine that. Your credit score and other variables, however, have the last say on this.
You will always benefit from having a loan. After speaking with a financial counselor, make your final decision.
Every month on the 30th or 31st, banks release interest rates.