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 a long-term financial assistance. It lets you withdraw money from your account even with zero balance.
Both are generally referred 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.
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 credits
Features of cash credit facilities may vary
based on the lender you choose. However, here is an overview of its general
eligibility requirements.
- Age restrictions: It is 25 for almost all lenders. Contact your lender to know more about it.
- Years of experience in business: This too varies based on the lender you approach. The general recommendation is three years.
- Certain lenders require that you have filed IT returns at least for one year. You will have to submit them along with your loan application.
- Proprietorships, partnerships, limited liabilities and publicly traded firms can apply for a working capital loan. Certain lenders even have restrictions on the type of companies that can apply for cash credit.
- You should submit collateral to avail cash credit facility. Almost all lenders accept real estate for the purpose. You may even use your company assets for it.
Documents you need
- Chartered account-certified financial statements
- Bank statements of six months
- Income tax returns of one year
- Proof of your collateral
- Records of your loan repayment (if applicable)
- Other documents your lender may request
Overdraft Facility
Eligibility requirements
You should fulfill the following requirements to avail a personal
loan overdraft facility:
- Above 25 years of age
- A monthly income of at least INR35000
- Should be in the same job at least for six months
- Should have at least two years of work experience
Documents required
- The copies of your salary slips of three months
- Proof of income; bank statements for three months
- ID proof
- Proof of your residence
Advantages
|
Cash credit |
Overdraft |
|
Ensures working capital at the earliest |
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 is your choice of loan, you can apply either offline or online. Almost all lenders encourage online application. 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.
Points to remember
You may take
either cash credit or overdraft as per your requirements.
Whatever is your choice, keep the following pointers in mind:
- 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. - Do your due diligence: Do a
thorough research on the market. Evaluate all available options. As you know,
information is at your fingertips today. Get the most of it. Make sure that you
are researching well on the factors like repayment tenure. Doing this makes
sure that you get the loan with the lowest interest rate available. - Borrow within your limit: Lending
is now a booming industry. Quite naturally, taking 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. - 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. - Go for the shortest term
possible: The prospect of a long-term loan is definitely appealing. However, it
is not good for your pocket. For instance, the interest of a short-term loan
stands as 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 in
the lines of your increasing monthly income. - Maintain a good credit score:
This applies specifically to that availing short-term overdraft facility. Here,
the bank evaluates your credit score when determining your loan amount. This
may not apply to those availing a long-term loan with collateral. - Be mindful of the processing
fee: This is something that 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 overdraft are the much sought-after financial products in India. These are easy to avail and need only minimum paperwork. For a diligent entrepreneur, these are the easiest ways to expand their business.
What is the difference between Cash Credit and Overdraft FAQs:
1. 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.
2. 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.
3. When do banks generally generate interest rate?
Banks generate interest rates on the 30th or 31st of every month.
4. 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.
5. Whom should I approach to express concerns or register complaints?
You can call the toll-free number or contact us in person.
6. How to know my EMI?
You can use an EMI calculator for the purpose. The Internet abounds in apps designed for the purpose.
7. 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.
8. 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.
