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Cash credit is a type of working capital loan that is available for 12 months tenure. It allows businesses to withdraw funds from their account in excess of their account balance as often as they desire, up to a predetermined borrowing limit. On the successful completion of the loan term, the cash credit limit is renewed. Under this financing arrangement, the interest is applicable only on the withdrawal amount and not on the entire borrowing limit.
The following is a list of factors that go into determining the cash credit loan eligibility and your borrowing limit.Parameters | Cash Credit Loan | Overdraft Facility |
Purpose | Available to businesses for meeting working capital requirements. | Available to both businesses and individuals for meeting their short term financial obligations. |
Basis | Cash credit loan is provided based on the availability of business stocks and inventories. | Overdraft facility is provided based on the applicant's relationship (amount of investment held, type of account, etc.) with the financial institutions. |
Interest Rates | Cash credit interest rates are lower than overdraft facilities. | When compared to cash credit, overdraft interest rates are slightly higher. |
Account Opening | You need to open a new account to receive the cash credit loan amount. | You can avail of the overdraft facility from your existing account. |
Loan Tenure | Cash credit loans usually have a one-year repayment period. | Overdraft facility repayment tenure can be monthly, quarterly, half-yearly, or yearly. |
Loan Amount | Under this financing arrangement, the sanctioned amount does not decrease with time. | Under the overdraft facility, the sanctioned amount reduces monthly. |
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.
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