Commerce (/commerce/) > List of Commerce Articles (/commerce/articles/) > Difference Between Cash Credit And

Overdraft (/commerce/difference-between-cash-credit-and-overdraft/)

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Difference between Cash Credit and Overdraft

Working capital of the business is essential for running the daily operations, and for that the company needs to take
short term loans or long term loans. The popular options in short term loans are cash credit and overdraft and long
term loan options are line of credit or business loans, etc.

Cash credit and overdraft are two types of short term loan facilities offered by the lenders to the businesses.
Overdraft facility is also offered to individuals based on their relationship with the bank.

Cash credit is referred to as a short term business loan that is offered to businesses for maintaining the working
capital, while overdraft facilities are offered to businesses and individuals who wish to withdraw more than their
available balance in the bank account.

Following are some points of difference between cash credit and overdraft.

Cash Credit Overdraft

Definition

Cash credit is a type of short term loan Overdraft facility is also a loan facility, which is provided to an individual
facility that is provided by banks or or a business, based on the relationship with the bank. In this system,
financial institutions to businesses for an individual can withdraw an amount greater than his available balance
maintaining their working capital till a specified limit as per regulations of the bank

Purpose

For maintaining the working capital of Overdraft facility is offered for meeting short term obligations of
the business, cash credit is offered individuals or businesses

Rate of Interest

Rate of Interest is comparatively lower Rate of interest is higher than the cash credit
than overdraft

Need of account

New account needs to be opened Overdraft can be availed from an existing account

Calculation of Interest

Calculated based on the entire amount Calculated based on only the amount that is availed
that is withdrawn

Duration of loan

The loan duration is generally 1 year The loan duration can vary and it can be monthly, quarterly, half yearly
or yearly

This article was all about the topic of Difference between Cash Credit and Overdraft, which is an important topic for
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