Cash credit provides lower interest rates with collateral backing, while overdrafts offer flexibility with higher fees. Evaluating credit history and cash flow needs helps businesses choose the right option. Before opting for cash credit or overdraft, account holders should understand their relationship with financial institutions.
The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal. This means that as you repay the borrowed amount, the credit becomes available again for you to utilize. It provides a continuous funding source for businesses or individuals, eliminating the need to reapply for credit each time funds are required. Whenever you use a credit card, you are basically borrowing funds from the credit card company to buy goods or services.
Cons: Potential Risks of Overextending with Overdraft Facilities
Besides this, there are several other points of difference between them. Cash credit and overdraft facilities come with different credit limits and usage terms. Cash credit offers a fixed limit based on the collateral value, while overdrafts allow the account to go into a negative balance up to a certain limit. Understanding these differences helps account holders choose the option that best suits their working capital needs. Overdraft facilities offer account holders the flexibility to withdraw more money than their account balance, up to a certain limit. This can be particularly useful for individuals and businesses to cover short-term cash flow issues without facing penalties.
It’s a short-term financing scheme provided by banking and NBFCs to their customers. If businesses do not have working capital, they can use this facility where they have to pay a low-interest rate cash credit vs overdraft on the account’s daily closing balance. When it comes to repayment, cash credit facilities often have more flexible terms compared to overdraft facilities. Borrowers can repay the amount withdrawn over a longer period of time, which can help manage cash flow.
To learn more about the various products and services at HDFC Bank that can benefit your enterprise, you can check out the MyBusiness page here.
Key Features and Purpose of Overdraft
Overdrafts are ideal for businesses experiencing temporary cash flow gaps. Evaluating monthly cash inflows and outflows can help businesses determine the appropriate overdraft limit to avoid excessive fees and financial strain. Cash credit is an ideal solution for businesses to meet their working capital requirements. It allows businesses to withdraw funds up to a pre-approved limit, helping them manage day-to-day operations smoothly. For instance, a textile business in Surat might use cash credit to purchase raw materials, ensuring uninterrupted production.
So, let’s delve deeper to understand the better choice for your business. In most cases, cash credits are commonly renewed on an annual basis for business customers. If you don’t think you need overdraft protection — or you don’t want to enable overspending — you can always opt out of overdraft protection. This may cause some inconvenience and embarrassment if your payment is declined at the register.
Features and benefits of our business loan
As with any loan, the borrower pays interest on the outstanding balance of an overdraft loan. Often, the interest on the loan is lower than the interest on credit cards, making the overdraft a better short-term option in an emergency. In many cases, there are additional fees for using overdraft protection that reduce the amount available to cover your checks, such as insufficient funds fees per check or withdrawal. Cash credit facilities are often used by businesses to manage their working capital needs.
What does it mean to overdraft your account?
- Often, the interest on the loan is lower than the interest on credit cards, making the overdraft a better short-term option in an emergency.
- Ultimately, the right use of financial tools like cash credit, overdraft, and various business loans could significantly contribute to the stability and growth of a business.
- Here, money can be withdrawn even when there is no fund in the account.
- Imagine a fast-rising industry executive in Delhi negotiating better terms for an overdraft based on their strong banking relationship.
Ultimately, the choice between cash credit and overdraft facilities will depend on the borrower’s financial needs and circumstances. When it comes to the approval process, cash credit facilities are usually more difficult to obtain than overdraft facilities. Banks and financial institutions typically require borrowers to provide collateral or meet certain credit criteria to qualify for a cash credit facility. In contrast, overdraft facilities are often easier to obtain, as they are usually linked to the borrower’s existing bank account. Account holders may be pre-approved for an overdraft facility based on their account history and creditworthiness.