Organizations require funds to meet their monetary requirement. The finance requirement can either be long term or short term. Short term loans will be in the form of cash credit and overdraft.
1. A cash credit bank provides after the required security is given to secure the loan and it is usually be charge on the current assets (inventory or debtors or collateral security) of the organization.
2. Once a security for repayment has been given, the company can withdraw from the bank more than what he holds to his credit, up to a certain specified amount sanctioned by the bank.
3. Usually banks provide cash credit to finance the working capital requirements for the day to day running of the business.
4. The bank charges interest on the amount used not on the limit sanctioned. The bank has the right to demand money lent at any time.
5. One interesting thing is, bank will levy charges for non-usage of entire limit sanctioned. Additionally penal interest will be charged by the bank on the amount withdrawn above the specified limit.
1. Bank Overdraft is a facility provided by the bank to its customers withdraw money more than the amount he holds in his account and security usually be charge on the fixed assets of the company like land & building, shares, debentures, etc.
2. The overdraft limit sanctioned by the bank depending upon the securities pledged or repayment capacity of the Account holder and the drawing limit may vary from bank to bank and borrower to borrower.
3. Interest is charged on the amount utilized not on the limit sanctioned. The bank has the right to demand money lent at any time with short notice.
Difference between cash credit and overdraft account
Even though both the loans serve the short term money requirement, there certain difference noted below