Understanding the Difference – Cash Credit vs. Overdraft Explained

February 12, 2025

13 min read

Cash credit is a short-term business loan. It is meant for entrepreneurs wanting to get quick working capital. An overdraft facility, on the other hand, is long-term financial assistance. It lets you withdraw money from your account even with a zero balance.

Both are generally referred to as credit facilities banks or lenders offer borrowers. Your lender uses the hypothecation of the company’s inventories for the purpose. Certain financial institutions even consider bank statements.

Overdraft vs Cash Credit – Key Differences

Cash credit and overdraft facilities may appear similar at a glance. However, the two are entirely different financial products. Here are some of the factors that set the two apart:

Features	Cash credit	Overdraft
Purpose	To help you buy raw materials, take care of receivables and maintain stocks	To keep your business operational
Purpose	Individual requirements	To fulfill non-business requirements
Calculating rate of interest	Based on the entire amount you withdraw	Based on the amount used
General rate of interest	Lower	Higher
Bank account	Need to open a separate account	You can use your current account to avail the facility
Maximum amount	Up to 60% of the value of your inventories and receipts	The lender decides based on your account and your relationship with the institution
Limit of withdrawal	Can be changed based on the value or quantity of your inventories	Cannot be changed. Your current balance may influence your current account
Charges	Nil	Your lender decides

Eligibility requirements and documentation

Cash Credit Eligibility

Features of cash credit facilities may vary based on the lender you choose. However, here is an overview of its general eligibility requirements.

Eligibility Criteria	Details
Age Restrictions	Typically 25 years for most lenders. Contact your lender for specific details. This is to ensure that responsible adults are using the cash credit facility which helps increase the repayment rate and bring down default rates.
Years of Business Experience	Generally recommended to have a minimum of three years of business experience. Experienced professionals are more likely to utilize the funds efficiently which enables them to not only increase profitability of their business but also repay the cash credit easily and on time. This is great for lenders too as their overall risk on loan books is decreased when lenders are seasoned entrepreneurs.
Income Tax Returns	Some lenders require at least one year of filed IT returns. Submission along with the loan application is needed. IT submission gives the most reliable proof of the actual earnings and the liquidity position of an individual and a company. It helps the lenders to assess whether the applicant is cash flow positive enough to cover the repayment without facing any issues.
Business Structure	Proprietorships, partnerships, limited liabilities, and publicly traded firms are eligible. Certain lenders may have restrictions based on the type of companies. As based on the type and the structure of the company, the risk component may increase for the lenders which can make it unsuitable for them to lend. Also, the legal implications may come into the picture, hence it is important to provide accurate business information as requested by the lenders during the time of the application.
Collateral Requirement	Collateral submission is necessary to avail cash credit. Real estate is commonly accepted, and company assets may also be utilized. Collateral is secured by the lenders to decrease their risk exposure. A collateral backed loan has the highest probability of repayment. As failing to do so gives authority to the lenders to liquidate the collateral to recover any outstanding dues. Thus, decreasing the lending risk exponentially.

Cash Credit Document Requirements

Document Requirements	Details
Financial Statements (Certified)	Chartered accountant-certified financial statements are required. It is important for the financials to be certified by a Chartered Accountant, as it implies that the numbers are accurate and as per the standards of Indian accounting standards. Also, it gives a sense of surety to the lenders about the authenticity of the business financials. Which is important as it plays a major role in the lending decision.
Bank Statements	Submission of bank statements for the last six months is mandatory. Bank statements highlight the liquidity of the company or the individual. By collecting this information over the last 6 months, the lender is able to collect a bi enough dataset which can help them make an accurate assessment on the repayment capacity of the borrower.
Income Tax Returns	Provide income tax returns for at least one year.
Collateral Proof	Documentation proving the existence and value of collateral is necessary. Collateral decreases the risk exposure of the lender. As in an event of default, the lender can liquidate the collateral to recover the dues. Hence, a document highlighting the accurate value of collateral is necessary to ensure that the borrower is not giving an undervalued collateral which may not be helpful in recovering dues.
Loan Repayment Records	If applicable, records of previous loan repayments should be included. This can help the lender make a good assessment of the borrower’s past borrowing practices and habits, past loan records are one the major deciding factors behind the terms and conditions offered to the borrower. It is usually determined with the help of credit history. However, in certain cases a disclosure may be required.
Additional Documents	Other documents may be requested by the lender during the application process. The borrower should ensure that they provide whatever documents are asked to make the assessment. As this would help speed up the process and secure the facility faster. It is also important to ensure that the information and documents provided are authentic and reliable.

Overdraft Facility Eligibility

You should fulfill the following requirements to avail of a personal loan overdraft facility:

S.No	Eligibility Criteria
1	Above 25 years of age : This is one of the basic criteria to meet for securing an overdraft facility. This is kept in place to weed out potential young and low earning individuals who may face difficulties with repaying the overdraft.
2	Monthly income of at least INR 35,000 : The minimum income criteria is set in place because this would provide the banks the needed confidence that the overdraft would be paid back. I.e. the borrower has the means to repay the overdraft facility availed by them.
3	Same job for at least six months : This indicates stability, and essentially decreases the risk associated with relaying the overdraft facility. As a person who’d have a regular employment since the past 6 months is more likely to repay the overdraft on time.
4	Minimum two years of work experience : Again, work experience criteria is set forth to ensure that the borrower has a stable income and would be able to repay the overdraft commitments, this decreases the risk with lending to the individuals taking overdraft facility.

Overdraft Facility Document Requirement

S.No	Document Requirements
1	Copies of salary slips for the last three months : This is one of the basic document requirements, salary slips indicate that the applicant has regular employment and is earning money to cover the repayment.
2	Proof of income: Bank statements for three months : The lenders make an assessment on the balance float and regular commitments a person may have. Bank statements give a clear picture on how much an individual is left with after their regular expenses.
3	ID proof : ID proof is again one of the most basic and absolutely essential requirements for any purpose, especially financial purposes. ID proof as the name suggests confirms the identity of the applicant, which is crucial from Know Your Customer (KYC) regulation standpoint.
4	Proof of residence :Residence proof is a basic KYC requirement, this is done to ensure that the lender has a communication address to send any official communication, and permanent address where the applicant can be found. This becomes even more important from the regulatory standpoint to avoid any frauds or misuse of funds.

Advantages of Cash Credit and Overdraft

Cash credit	Overdraft
Ensures working capital at the earliest. The nature of cash credit allows the entrepreneur to secure the credit without going through the hassle of official paperwork.	Helps you maintain a good score
You pay interest only of the amount used	Ensures timely repayment of loans
Minimal documentation and fast processing	Minimum paperwork
Offers maximum flexibility	Lower cost of interest

How to Apply

Whatever your choice of business loan, you can apply either offline or online. Almost all lenders encourage online applications. Visit the financial institution’s official portal. Fill up the application form; done. Your choice company may contact you on the phone. And a professional will help you through the entire process. You may also visit the lender in person and apply for the same.

Remember When Opting For Cash Credit Or Overdraft

Now that we have discussed the difference between OD and CC. You may take either cash credit or overdraft as per your requirements. Whatever your choice, keep the following pointers in mind:

1. Know Your Requirements:

Do you really need a loan? Don’t burden your finances with impulsive buying. Stay away from the temptation to buy something big during festivities. Lately campaigns are run to lure customers into buying things that they may not need by offering attractive lending options. It is imperative for the individual as well as the entrepreneur to have a clear priority and purchase things not because of clever marketing strategies alone.

2. Do Your Due Diligence:

Do thorough research on the market. Evaluate all available options. As you know, information is at your fingertips today. Get the most out of it. Make sure that you are researching well on the factors like repayment tenure. Doing this ensures you get the loan with the lowest interest rate available. Also, there may be several hidden costs mentioned in the fine print that the borrower may not be aware of. Doing a detailed assessment will help avoid such costs later, and secure the loan which is most aligned with your repayment plans, and cost bearing capacity.

3. Borrow Within Your Limit:

Lending is now a booming industry. Quite naturally, taking a loan is now a breeze. However, make sure that you don’t borrow more than you can afford. Calculate your income and the EMI interest you have to pay. The loan repayment amount should not exceed 15% of your monthly income.

4. Read the Fine Print:

Your lender may not reveal the total cost of your loan. But it would be there in the documents you have to sign. Read the terms and conditions. Remember, additional charges add up to the cost of a loan.

5. Go for the Shortest Term Possible:

The prospect of a long-term loan is definitely appealing. However, it is not suitable for your pocket. For instance, the interest on a short-term loan stands at 58% of the loan amount. It goes up to 128% in a long-term loan. If a long-term loan is a must, increase your EMI payment annually. You can do it along the lines of your increasing monthly income. Or you can discover various prepayment options where a part payment at regular intervals can significantly decrease your total interest liability for the long term loans.

6. Maintain a Good Credit Score:

Credit score helps the lenders assess the risk associated with lending to an applicant. An applicant with a low credit score indicates higher risk due to unhealthy borrowing patterns in the past. Hence, they may be offered unfavorable terms and conditions on the loans. Hence, it is important to maintain a healthy credit score to secure suitable loan terms and conditions and interest rates. This applies specifically to those availing of short-term overdraft facilities. Here, the bank evaluates your credit score when determining your loan amount. This may not apply to those availing of a long-term loan with collateral.

7. Be Mindful of the Processing Fee:

This varies from lender to lender. Inquire it before taking that final step. Finally, don’t forget to check the loan utilization charge. Lenders in general, don’t charge for unused loans. However, certain financial institutions charge for it after a specified time limit. And inquire about foreclosure charges. Here too, the lender you choose takes the final decision. Cash credit and overdrafts are the much sought-after financial products in India. These are easy to avail and need only minimum paperwork. For a diligent entrepreneurs, these are the easiest ways to expand their business.

Frequently Asked Questions

What is Emi?

EMI stands for Equated Monthly Installment. This is the amount you pay your lender on a specified date. You do it until you fully repay your loan amount.

What is the General Tenure for a Personal Overdraft Loan?

It varies based on the lender you approach. In a general scenario, the tenure is one to five years.

When Do Banks Generally Generate Interest Rate?

Banks generate interest rates on the 30th or 31st of every month.

Why the First Installment of Overdraft Loan is Always High?

Your first installment often consists of stamp duties, PF and insurance. Thus it is generally higher. Pay these charges in Advance. And you will only need to pay the EMI along with the principle amount.

Whom Should I Approach to Express Concerns or Register Complaints?

You can call the toll-free number or contact us in person.

How to Know My Emi?

You can use an EMI calculator for the purpose. The Internet abounds in apps designed for the purpose.

Should I Go for a Cash Credit or Overdraft Facility if I Have the Money?

Having a loan will always work in your favor. Take a final decision after contacting a financial advisor.

What is the Maximum Amount I Can Get as a Personal Loan?

That depends on the lender of your choice. However, your credit rating and other factors have a final say here.

Which is Better, Cash Credit or Overdraft?

Cash credit and overdraft serve different purposes. Cash credit is a predetermined limit offered by a bank, typically used for working capital needs, with interest applied to the utilized amount. Overdraft, on the other hand, allows you to overdraw your current account up to a specified limit, often for short-term needs. The choice between them depends on your financial requirements; CC for ongoing expenses and OD for occasional cash flow gaps.

In What Situations is an Overdraft More Suitable for Businesses?

An Overdraft is more suitable for businesses when they require occasional short-term access to extra funds. It’s a flexible credit option that allows them to overdraw their bank account up to a pre-approved limit. In contrast, Cash Credit (CC) is a continuous, long-term credit facility. Overdraft is ideal for managing liquidity gaps, while Cash Credit is better for consistent, ongoing capital needs.

Can a Business Have Both Cash Credit and Overdraft Facilities Simultaneously?

Yes, a business can have both Cash Credit (CC) and Overdraft (OD) facilities simultaneously, as they serve different financial purposes. Cash Credit provides a revolving line of credit for working capital needs, while Overdraft allows a business to overdraw its current account for short-term cash requirements. The key difference lies in how funds are accessed and utilized, making it possible to have both facilities to manage distinct financial aspects effectively.

What Are Some Similarities Between Cash Credit and Overdraft Facilities?

Cash credit and overdraft facilities share some similarities in that they both provide short-term financing solutions to meet working capital needs. Both involve a predetermined credit limit set by the financial institution, allowing businesses to withdraw funds as required. However, the key difference lies in how the funds are utilized: cash credit is typically used for specific business purposes, while overdraft offers flexibility in utilizing the funds for any financial need.