Cash Credit vs. Overdraft: Which is the Right Choice for You?

By OneCard   |   October 28, 2024

    Sharing is caring 😉

Business success relies heavily on planning and making strategic decisions. But what happens when an unexpected challenge strikes or a golden opportunity pops up out of the blue? In these moments, choosing the right financing solution can be a game-changer. Businesses often face the choice between cash credit vs overdraft. While both are short-term loans that fund day-to-day operations, they come with requirements and advantages tailored to different situations. So, let’s delve deeper to understand the better choice for your business.


What is Cash Credit?

Cash credit provides businesses with loans to cover various obligations, such as inventory purchases and managing expenses. Here, the lender charges interest on the amount withdrawn and not the entire loan amount. This benefits you as you only pay interest on the actual amount used, resulting in better cost-efficiency and flexibility for your credit needs. This factor gives cash credit an edge over overdraft when comparing cash credit vs overdraft.

What is an Overdraft?

Cash credit provides businesses with loans to cover various obligations, such as inventory purchases and managing expenses. Here, the lender charges interest on the amount withdrawn and not the entire loan amount. This benefits you as you only pay interest on the actual amount used, resulting in better cost-efficiency and flexibility for your credit needs. This factor gives cash credit an edge over overdraft when comparing cash credit vs overdraft.

Also Read: Credit Card Loan - What is It & How to Apply Loan on Credit Card?

Differences Between Cash Credit and Overdraft

Now that we have a basic understanding of cash credit and an overdraft, let us look at the differences between cash credit and overdraft:

1. Nature of the Facility

Cash credit is a long-term credit facility designed for businesses that require continuous funding. An overdraft, on the other hand, is a short-term facility intended to cover temporary cash flow needs in businesses.

2. Security Requirement

Cash credit generally requires collateral that will act as a guarantee for loan repayment. In contrast, in most cases, overdraft facilities do not require collateral, especially for smaller amounts. The bank grants them on the basis of your credit history, investments, and relationship with the bank.

3. Repayment Terms

Cash credit comes with flexible repayment terms. You can avail cash credit for a minimum duration of one year. Whereas, for an overdraft, the repayment period typically ranges from a month to a quarter, with one year being the maximum duration within which you must repay the overdrawn amount. Card issuers like One Credit Card simplify the repayment process with their user-friendly app, enabling you to manage and track your credit usage effectively.

4. Credit Limit Flexibility

Cash credit usually has a fixed credit limit that is not regularly reviewed. Conversely, lenders can adjust the credit limit of overdrafts based on performance and requirements. With an overdraft, the bank reduces the credit limit every month, unlike with cash credit, where the credit limit remains the same.

Also Read: How To Get a Higher Credit Card Limit?

5. Interest Rates and Fees

Interest rates for cash credit vary based on your credit history, business performance, and the type of security offered. Generally speaking, due to their unsecured nature, overdrafts have higher interest rates than cash credits. Overdrafts can also have additional costs related to maintenance and overdrawn amounts.

Choosing Between Cash Credit and Overdraft

When choosing between cash credit vs overdraft, you must consider several factors to select the most suitable option. First, think about the purpose for which you need the money. An overdraft facility will be appropriate for short-term cash flow gaps. But if you need to buy things or meet seasonal demands, cash credit might be a better choice. Next, check your credit history and collateral availability. Overdraft facilities are more accessible for businesses with limited credit or collateral since cash credit generally requires a strong credit history and assets. Finally, compare interest rates and repayment terms to see which facility works best with your company’s needs and aspirations.

Invest time in researching your business’s financial needs and collateral to make the right choice between cash credit vs overdrafts. By doing this, you will make an informed decision about the facility that best suits your financial needs. While specifics may vary, card issuers like One Credit Card offer convenience, security, and valuable rewards for your day-to-day transactions.


**Disclaimer: The information provided in this webpage does not, and is not intended to, constitute any kind of advice; instead, all the information available here is for general informational purposes only. FPL Technologies Private Limited and the author shall not be responsible for any direct/indirect/damages/loss incurred by the reader for making any decision based on the contents and information. Please consult your advisor before making any decision.