Cash credit and overdraft are popular financial terms. Overdraft is known to be one the oldest concepts in comparison to cash credit. Both of them are similar in several ways. But there are some differences between them.
What Is Cash Credit?
- It is one such facility that is offered by banks or any financial institution for lending of short duration and is needed by a company or organization for meeting their credit requirement.
- Cash credit is that credit amount that is provided till a limit which is pre-defined.
- It is given for serving only business purpose if the customers have given company assert and papers, inventory and so on to the bank or any financial institution.
- The cash credit limit is equal to the company’s working capital need.
- The limit of withdrawal is determined by a bank and it varies from one to another.
- Interest gets charged on the additional withdrawal.
- It provides facility of cheque book.
What Is Overdraft?
- This facility is provided by banks to the customers for withdrawing huge amount of money from the accounts than what is present in their accounts.
- It is available usually to the customers’ of current accounts and if it is an exceptional case then to the holders of savings account.
- The additional withdrawal is actually determined by the banks or financial institutions and actually varies from one bank to another.
- Interest is actually charged on the amount of overdraft that is the additional amount which is withdrawn above any deposit.
- It is repayable on any demand that is the bank may call a customer for repaying the amount at urgent notice.
- Account holders can avail the facility of cheque book.
What’s The Difference Between Cash Credit And Overdraft?
Cash credit is commonly offered to business than to individuals. It needs a security that should be offered as collateral on an account in terms of cash exchange. This security may be one tangible asset like stock, raw material or any other commodity. The limit of credit that is extended on cash credit account is usually a percentage of collateralized security’s value.
Sometime a bank or financial institute offers cash reserve account but names it as a cash credit. It is a line of credit that is unsecured and acts similar to an overdraft protection. It offers higher limits of overdraft typically. It also has smaller real costs of interests on the funds that are borrowed than any overdraft, because penalty fees are never triggered for making use of the account.
The two types of overdrafts that are most commonly used are standard overdraft on any checking account as well as one secured overdraft account that will loan an amount against varied financial instruments.
Any standard overdraft refers to the act that involves withdrawal of more amount of money from one account than the fund or balance present in the account would allow. So if you have a $30 in one checking account and withdraw $35 for payment of an item, any bank that will permit overdrafts will cover that $5 as well as charge you a little fee typically for their service and not a huge penalty for overdraft. You will generally be charged a different fee for each of the purchase which is in excess of the balance present your account. But different financial institutions will handle all fees in a different way.
An overdraft that is secured will act more like one traditional loan. Similar to any cash credit account, a sum of money is lent by one institution, but there is a huge variety of collateral available to make use of for securing the credit. For instance, you may be allowed to make use of shares of mutual funds, debentures as well as LIC policies. Usually speaking it is the possible only when any borrower owns one large account at a bank and has a relationship with the bank for a long term.
The process that grants short duration credit to any account holder when his balances get down below zero is named as an overdraft protection.
It comes in various types and differently functions on the basis of the relationship with the bank. Overdraft protection commonly links together two accounts, letting funds to be drawn out automatically from a reserve account when any primary account goes below zero balance. This function will aid to avoid fees for overdraft or having not enough money for executing any transaction.
It can be sold in the form of a distinct line of credit that is unsecured and is linked to the primary account. It acts as a loan for urgent situation during any overdraft. This kind of overdraft protection never comes with any overdraft fee but always charge interest on the balance of credit line. If you are a customer you can select the way of using an overdraft protection on an account and will also be able to move out completely for preventing the account from holding any negative balance. Consult with your bank for understanding the way overdrafts get treated for any specific account.
Cash credit and overdraft are two vital tools for fulfilling any capital need of an individual or company for short duration. Both are similar in various ways but the above mentioned differences can also be seen between them.