Understanding Cash Credit (CC) and Overdraft (OD) Facilities
Businesses often need short-term financing solutions to effectively manage their working capital. Two common financial instruments that assist in this area are Cash Credit (CC) and Overdraft (OD). While both options provide flexibility in fund usage, they serve distinct purposes. Let’s delve into their key features and differences.
What is Cash Credit (CC)?
Cash Credit is a short-term financing option offered by banks to help businesses meet their working capital needs. It allows businesses to withdraw funds up to a sanctioned limit, even if their account balance is zero. The amount borrowed is usually secured against inventory, receivables, or other business assets. A significant benefit of CC is that interest is charged only on the amount utilized, rather than the entire sanctioned limit.
Key Features of Cash Credit:
– Purpose: Mainly intended to finance working capital needs.
– Security: Requires collateral such as inventory, receivables, or fixed assets.
– Repayment: Offers flexibility with no fixed repayment schedule; however, regular account reviews are performed.
– Interest: Charged only on the amount utilized, not on the full limit.
– Tenure: Generally reviewed annually and renewed based on business performance.
What is Overdraft (OD)?
An Overdraft facility enables businesses or individuals to withdraw more money than what is available in their current account, up to a pre-approved limit. Unlike Cash Credit, OD can be either secured or unsecured, depending on the borrower’s creditworthiness and their relationship with the bank.
Purpose: Suitable for managing short-term cash flow mismatches and emergencies.
Security: Can be secured against assets or unsecured based on credit history.
Repayment: No fixed repayment schedule, but interest accrues on the utilized amount.
Interest: Charged only on the utilized amount.
Tenure: Generally renewable annually or as per the bank’s discretion.
CC vs. OD: Key Differences
| Feature | Cash Credit (CC) | Overdraft (OD) |
|---|---|---|
| Purpose | Business working capital needs | Short-term cash flow mismatches |
| Security | Secured against business assets | Can be secured or unsecured |
| Repayment | Flexible with reviews | Flexible with interest accrual |
| Interest | Charged on the utilized amount | Charged on the utilized amount |
| Tenure | Typically renewed annually | Renewable annually or per bank policy |
Understanding Cash Credit (CC) and Overdraft (OD) Facilities
Businesses often need short-term financing solutions to effectively manage their working capital. Two common financial instruments that assist in this area are Cash Credit (CC) and Overdraft (OD). While both options provide flexibility in fund usage, they serve distinct purposes. Let’s delve into their key features and differences.
What is Cash Credit (CC)?
Cash Credit is a short-term financing option offered by banks to help businesses meet their working capital needs. It allows businesses to withdraw funds up to a sanctioned limit, even if their account balance is zero. The amount borrowed is usually secured against inventory, receivables, or other business assets. A significant benefit of CC is that interest is charged only on the amount utilized, rather than the entire sanctioned limit.
Key Features of Cash Credit:
– Purpose: Mainly intended to finance working capital needs.
– Security: Requires collateral such as inventory, receivables, or fixed assets.
– Repayment: Offers flexibility with no fixed repayment schedule; however, regular account reviews are performed.
– Interest: Charged only on the amount utilized, not on the full limit.
– Tenure: Generally reviewed annually and renewed based on business performance.
What is Overdraft (OD)?
An Overdraft facility enables businesses or individuals to withdraw more money than what is available in their current account, up to a pre-approved limit. Unlike Cash Credit, OD can be either secured or unsecured, depending on the borrower’s creditworthiness and their relationship with the bank.
