The primary difference between an Overdraft (OD) and Cash Credit (CC) facility lies in how the loan amount is determined and how the credit limit behaves over time.
Here's a detailed breakdown:
Loan Amount Determination
- Cash Credit (CC): The loan amount sanctioned is primarily based on the value of your business's current assets, specifically stocks and inventory. The more inventory you hold, generally, the higher the credit limit you can obtain.
- Overdraft (OD): The loan amount sanctioned under an overdraft is based on the financial health of the borrower and the value of any security deposits or collateral provided.
Credit Limit Behavior
- Cash Credit (CC): The credit limit generally remains stable throughout the loan term, subject to periodic reviews and renewal based on the continued value of your stocks and inventory.
- Overdraft (OD): The credit limit typically reduces monthly as you repay the principal amount. This is because the loan is often structured as a term loan with overdraft facility.
Summary Table
| Feature | Cash Credit (CC) | Overdraft (OD) |
|---|---|---|
| Loan Basis | Value of stocks and inventory | Financials and security deposits |
| Limit Behavior | Typically remains stable | Usually reduces monthly |
Further Considerations
While the above points highlight the key differences, it's important to note:
- Purpose: CC is generally used for working capital needs, while OD can be used for various purposes, including short-term funding gaps.
- Interest: Interest is charged only on the amount utilized from both CC and OD facilities.
- Security: Both facilities may require collateral or security, depending on the lender and the borrower's creditworthiness.
Therefore, when choosing between OD and CC, businesses should consider their specific financing needs, asset base, and repayment capabilities.
