Cash Credit vs Overdraft: Key Differences

What is Cash Credit

Cash credit is like a revolving line of credit tied to your business current account, sanctioned as a lump sum you draw against as needed. It allows borrowers to withdraw funds up to a pre-approved limit to meet day-to-day operational requirements such as purchasing raw materials, paying suppliers, or managing inventory cycles.

Under a cash credit loan facility, interest is charged only on the amount actually used, not on the entire sanctioned limit. The borrowing limit is usually determined based on the borrower’s stock, receivables, and overall business turnover. Since it is closely linked to business operations, banks often require collateral such as inventory, receivables, or property.

What is an Overdraft

Overdraft loan comes in when your account balance dips below zero, up to a pre-approved limit, acting as a safety net rather than a dedicated facility. It is commonly offered to salaried individuals, self-employed professionals, and businesses with regular account inflows.

Overdrafts are typically linked to a current or savings account and are used to manage short-term liquidity mismatches. Interest is charged only on the overdrawn amount and for the duration it remains unpaid. Charges apply daily or monthly on the negative balance, usually higher than cash credit rates since it's more flexible. Depending on the type of overdraft, it may be secured (against fixed deposits, property, or insurance policies) or unsecured, based on the borrower’s credit profile and income stability.

Basis of Comparison	Cash Credit	Overdraft
Primary Purpose	Working capital for business operations	Short-term liquidity management
Eligible Borrowers	Businesses, traders, MSMEs	Individuals, professionals, businesses
Account Type	Separate cash credit account	Linked to savings or current account
Limit Determination	Based on stock, receivables, turnover	Based on income, account history, or collateral
Collateral Requirement	Usually required	May be secured or unsecured
Interest Calculation	On amount utilised	On overdrawn amount
Usage Flexibility	Business expenses only	Flexible personal or business use
Review Frequency	Periodic review by bank	Typically annual or ongoing

Basis of Comparison

Cash Credit

Overdraft

Primary Purpose

Working capital for business operations

Short-term liquidity management

Eligible Borrowers

Businesses, traders, MSMEs

Individuals, professionals, businesses

Account Type

Separate cash credit account

Linked to savings or current account

Limit Determination

Based on stock, receivables, turnover

Based on income, account history, or collateral

Collateral Requirement

Usually required

May be secured or unsecured

Interest Calculation

On amount utilised

On overdrawn amount

Usage Flexibility

Business expenses only

Flexible personal or business use

Review Frequency

Periodic review by bank

Typically annual or ongoing

Conclusion

Cash credit edges out for businesses needing reliable funds at better terms, while overdraft shines for quick personal buffers with neither being a one-size-fits-all. Understanding these differences helps borrowers avoid misuse, reduce interest costs, and maintain healthier cash flows. Assess your cash patterns and security position before choosing either of the modes. Additionally, financial marketplaces like Bajaj Markets let you compare options from top lenders hassle-free.