Cash credit (CC) and overdraft (OD) both allow eligible businesses to draw funds up to an agreed limit, but they are not interchangeable. The difference lies in the security structure, drawing conditions, intended use and lender's product terms.
1. Cash credit versus overdraft at a glance
| Feature | Cash credit (CC) | Overdraft (OD) |
|---|---|---|
| Typical purpose | Recurring business working capital | Short-term liquidity or business working capital, depending on product |
| Common security | Hypothecation of eligible stocks and receivables, sometimes additional security | May be secured by deposits, property or other security, or offered under a specific product |
| Available withdrawal | Often subject to drawing power based on eligible current assets | Subject to sanctioned OD limit and facility conditions |
| Interest | Typically on utilised outstanding, according to account terms | Typically on utilised outstanding, according to account terms |
| Review | Periodic review or renewal under bank policy | Depends on OD product and sanction terms |
These are common structures, not universal legal definitions. A particular bank may offer an OD product against stock or a CC product with additional collateral.
2. Cash credit example
A distributor has a sanctioned CC limit of ₹30 lakh. After considering eligible stock, debtors, creditors and stipulated margins, the bank calculates drawing power of ₹22 lakh. Even though the sanction is ₹30 lakh, the amount permitted for drawing can be limited to ₹22 lakh, subject to outstanding balance and other terms.
Monthly stock and receivables reporting may be required. Late or inaccurate statements can affect availability and account regularity.
3. Overdraft example
A business has an OD limit of ₹12 lakh against an acceptable security arrangement. It draws ₹5 lakh for a short period and later deposits collections into the account. Interest is generally charged on the utilised balance for the relevant days, subject to the agreement and applicable fees.
An OD is not automatically unsecured; security and eligibility depend on the product.
4. Which one is more suitable?
- Consider CC when a business has a recurring inventory-and-receivables funding cycle and can provide reliable current-asset reporting.
- Consider OD when the bank's OD product and security terms fit the business's short-term funding pattern.
- Compare interest, processing and renewal charges, collateral, reporting effort and the consequences of limit irregularity.
Neither facility should be used to finance long-lived fixed assets without appropriate sanction. A term loan may be more suitable for machinery or expansion.
5. How drawing power affects a CC account
Drawing power can change as eligible stocks and receivables change. It is distinct from the sanctioned limit. See our drawing power calculator and working capital calculator for illustrative calculations.
Frequently asked questions
Is interest charged on the entire sanctioned limit?
For many CC and OD facilities, interest is calculated on the amount actually utilised, while other fees may apply. Check the sanction terms.
Can CC and OD both be secured?
Yes. Security arrangements depend on the lender and product.
Can I use CC to buy machinery?
Using working capital finance for fixed assets can violate sanctioned end-use conditions. Discuss a suitable term loan with the bank.
Official references
Check the current scheme and bank terms before applying. This independent guide is not an official government or lender website.
Disclaimer: Educational information, not loan advice, approval or an offer of finance. Terms, policies and regulatory instructions can change.