GUIDESPERSONAL LOANS
Cash Credit vs. Overdraft: A Detailed Comparison
4 MIN • 
LAST EDITED BY ANKANA GHOSHAL ON JUNE 3, 2025.
LAST EDITED BY ANKANA GHOSHAL ON JUNE 3, 2025.
GUIDES LAST EDITED BY ANKANA GHOSHAL ON JUNE 3, 2025.
The two most common forms of short-term financing are cash credit and overdraft. Both provide fast access to money, but they differ in important ways that affect their suitability for clients. Making wise financial decisions requires an understanding of these distinctions. To better understand the distinctions between cash credit and overdraft, continue reading.
Cash credit is used mainly by businesses to meet their short-term working capital needs. This kind of loan is beneficial when a business encounters an unforeseen need for money, like sudden payroll requirements or large purchases of raw materials.
Businesses usually pledge collateral like fixed deposits, real estate, stock, or inventory to receive cash credit. The loan period is typically renewable upon reassessment and can last up to 12 months.
Because of the facility's short duration, cash credit limits are not very high, but they still offer a dependable source of funding for operational liquidity. It allows companies to continue operating smoothly daily without burning long-term cash reserves.
An overdraft account allows both individuals and businesses to withdraw more money than what is available in their bank account, up to a pre-approved limit. In other words, an overdraft is a line of credit banks give to manage short-term cash flow mismatches.
In essence, a bank overdraft is a negative balance facility that allows borrowing without obtaining a formal loan. Although banks occasionally request a guarantee or lien on assets for higher limits, most overdrafts are unsecured.
Interest is only assessed on the amount used, not the authorised limit. It is a versatile solution for short-term or urgent financial requirements.
The interest rate on overdraft loans, security needs, intended use of funds, and tenure are some variables that influence which of these two facilities is best. To help you comprehend the distinction between cash credit and overdraft, here is a thorough side-by-side comparison:
| Features | Cash Credit | Overdraft |
| Purposes | Primarily for business use, such as managing working capital, buying raw materials, or handling payroll | Can be used for personal or business needs, like managing cash flow gaps or emergencies |
| Loan Amount | Based on the value of collateral pledged by the business | Determined by financial health, credit history, and bank relationship |
| Limit | Fixed limit for the entire tenure | Limit may be reviewed periodically by the bank |
| Interest Rates | Lower interest due to collateral backing | Higher overdraft loan interest rates, as they’re mostly unsecured |
| Tenure | Typically 1–3 years, often renewable | Generally shorter, from a few days up to a year |
| Security | Requires collateral like inventory or receivables | Usually unsecured, but a personal guarantee may be requested |
| Account | Requires a dedicated loan account | Linked to the existing current account |
| Applicants | Designed for established businesses with adequate collateral | Available to individuals and companies with a sound credit track record |
Although they serve slightly different purposes, overdraft and cash credit share some standard features:
When weighing up cash credit vs overdraft, consider the following essential factors:
Banks and other financial institutions have numerous short-term financing options, but it's critical to comprehend their nuances. Overdrafts are more adaptable and available to individuals and businesses, whereas cash credit is designed for companies requiring continuous working capital support with pledged security.
Despite their similarities, cash credit and overdraft differ in their application process, interest structure, and use case. Cash credit may be more affordable if your company has substantial assets to pledge. However, overdrafts can be a sensible option if you require immediate, secure access to short-term funds.
The choice between cash credit and overdraft ultimately comes down to your risk tolerance, business size, and financial requirements. Examine every aspect in detail, speak with your bank, and select the option that best suits your needs.
