Cash Credit vs Overdraft Know Which Is Best For Business

Unlike other credit products, interest is charged on the daily closing balance. But if mistakes or surprises catch you off guard, and you don’t have a sufficient cash cushion easily available, an overdraft line of credit can provide a backup plan. Unlike traditional loans where interest is charged on the entire loan amount, cash credit facilities charge interest only on the amount actually utilized. This helps borrowers save on unnecessary interest costs, as they are not obligated to pay interest on the untouched credit limit.

If a customer doesn’t have enough funds in their account to complete a transaction, the overdraft covers the difference, allowing the account to go into a negative balance. An overdraft line of credit is a loan attached to your checking account. Some banks also allow you to access the line of credit if you need emergency cash. Usually, it works by linking your checking account to a savings account, another checking account, or a line of credit. If there’s a shortfall, this source gets tapped for the funds, ensuring that you won’t have a check returned or a transaction/transfer declined.

An Example of Overdraft vs. Credit Card

Collateral-free loan refers to any loan that does not require any asset, security deposit or the backing of a guarantor. Requires collateral, such as inventory, receivables, or property, to secure the loan. Overdraft has a shorter tenure, ranging from a few days to a year, depending on the bank’s policy and repayment history. The loan amount is typically based on the value of the collateral provided by the business.

Nature of the Facility

Both are flexible financing options that provide immediate liquidity to businesses and individuals, allowing them to manage cash flow more effectively during periods of financial shortfall. Each facility permits the user to borrow up to a predetermined limit and charges interest only on the amount used, not on the total credit available. Any small or mid-sized businesses need loans to scale up their business. The underutilisation charge, as discussed above, and account-closing charge can be very high for banks and financial institutions. You must keep that in mind before considering moving your CC or OD account to another lender. There can also be account-opening charges, but you can negotiate with the lender about the same.

Overdraft Protection

Since cash credit and overdraft are both lines of credit facilities offered by lenders, it is rather easy to be confused. Cash credits are short-term financial solutions that a business house can avail by securing any tangible company asset. This could be raw materials from the inventory, stocks or even account statements. As opposed to OD, cash credits are generally offered to business houses and not individuals. Credit history plays a vital role in determining eligibility for cash credit loans.

If an overdrawn account isn’t paid off in time, the bank may turn the debt over to a collection agency. Overdraft and Cash Credit usage can impact your credit score, as they contribute to your overall credit utilization and payment history. Let us assume that you need to buy administrative IT equipment worth Rs. 2.5 Lakh.

Any money you use is provided as a standard loan from your bank, so you’ll pay interest on the amount you borrow. However, overdraft lines of credit are often less expensive than standard overdraft protection programs, which may charge around $35 for each rejected transaction that hits your account. Still, some banks charge you a fee for each transfer from your checking line of credit or for each day that a transfer is made from your line of credit to your checking account. Also, the goals of optimising inventory or business expansion might never see fruition unless there are sufficient funds available. This is the reason several financial institutions offer flexible options in the form of Cash Credits (CC) and Overdrafts (OD) to their prospective customers. The primary difference between cash credit and overdraft lies in how these are secured.

1. It told the banks and credit unions to stop charging overdraft fees in these situations and a number of them have come up with plans to refund customers who were charged the fees in the past.
2. Cash credit is a short-term loan that companies and businesses get to meet their working capital expenditure.
3. The two of the most common types of overdrafts are standard overdraft on a checking account and a secured overdraft account that lends cash against various financial instruments.
4. It is common for overdraft protection to link two accounts together, allowing funds to automatically be drawn on a reserve account in the event of the primary account being drawn below zero.

How To Set Up Cash Credit and Overdraft Protection

You may accidentally overdraft when paying with cash credit vs overdraft a debit card, making an ACH payment, or when someone cashes a check you wrote for more than your account balance. However, overdrafting can also happen within your savings or money market account. Understanding how a checking line of credit works and what your alternatives are allows you to cover unexpected expenses while avoiding the fees of a standard overdraft protection program.

If you want to pay the loan back within a year, you’ll need to pay a total of $180 in interest plus $12.50 in fees. Some overdraft lines of credit will charge you a fee for each overdraft, and some have annual fees instead of, or in addition to, overdraft fees. If you have overdraft protection at your bank, you can spend more than the actual amount in your attached checking account.