OD and CC are financial instruments provided by banks as credit limits. They allow account holders to access funds when needed.
Understanding Overdraft (OD)
Overdraft, or OD, is a type of credit facility that allows an account holder to withdraw more money than they have in their account.
Key Characteristics of OD:
- Credit Limit: Banks establish a maximum amount you can overdraw, based on your financial statements and creditworthiness.
- Flexibility: You can use the funds as needed and repay them when possible.
- Interest Charges: Interest is charged only on the amount overdrawn and for the period it is utilized.
- Collateral: Overdrafts can be secured or unsecured. Secure overdrafts might require some form of asset as collateral and unsecured is based on creditworthiness.
Understanding Cash Credit (CC)
Cash Credit, or CC, is another form of credit facility where a bank allows a business to draw funds against hypothecation of inventory.
Key Characteristics of CC:
- Credit Limit: A bank sanctions a limit based on your business's inventory value.
- Inventory Hypothecation: The bank holds a charge over the business's inventory.
- Working Capital: Primarily used for managing day-to-day operational expenses.
- Interest Charges: Interest is charged on the amount utilized within the sanctioned limit.
Comparison Table: OD vs CC
| Feature | Overdraft (OD) | Cash Credit (CC) |
|---|---|---|
| Basis | Financial standing of account holder(s) | Inventory value |
| Usage | For personal or business needs, based on financial health | Primarily for business working capital |
| Collateral | Often unsecured or based on assets | Secured against business inventory |
| Interest | Charged on actual amount withdrawn | Charged on actual amount used |
| Approval | Based on creditworthiness and financial statements | Based on inventory value and business health |
| Limit | Sanctioned limit based on financial health | Sanctioned limit based on inventory hypothecation |
Practical Insight
Both OD and CC serve as crucial credit lines for businesses and individuals.
- Businesses: Use CC for managing day-to-day operational expenses, while OD can help cover short term gaps in cash flow.
- Individuals: Overdrafts can act as a buffer against unexpected expenses or temporary cash shortages.
Key Differences
- Security: CC is based on hypothecation of Inventory and OD is based on creditworthiness.
- Purpose: While both offer financial liquidity, CC is mainly for business working capital while OD is for individual or business financial needs.
In essence, both OD and CC function as credit facilities sanctioned by banks, providing financial flexibility to the account holder with OD based on financial statements and CC on business inventory.
