Cash Credit vs Overdraft

Business owners and salaried individuals alike often seek quick cash to bridge financial gaps. This is often fulfilled through the modes of cash credit and overdraft facility. Both of these provide availability of extra funds to cover financial requirements. While both allow borrowing beyond the existing funds, they are designed for different circumstances and borrower profiles. 

Financial marketplaces like Bajaj Markets help borrowers understand such financial products clearly and make informed decisions based on their usage patterns.

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.

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.

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.