Cash Credit vs Overdraft: Differences, Limits and Interest Calculation
A cash credit is a working capital limit secured mainly by stock and receivables, with monthly drawings capped by drawing power. An overdraft lets you draw beyond your account balance up to a limit, usually secured by property or fixed deposits. In both, you pay interest only on the amount used, for the days used.
What is a cash credit facility?
A cash credit is a revolving working capital limit for businesses that hold stock and sell on credit. The bank sanctions a limit based on your working capital needs, and secures it with a hypothecation of your current assets: raw materials, work in progress, finished goods and book debts.
You can draw up to the lower of two numbers:
- The sanctioned limit.
- Your drawing power (DP), calculated each month from the stock and debtor statement you submit, after deducting margins and creditors.
What is an overdraft facility?
An overdraft lets you withdraw more than the balance in your current account, up to a sanctioned limit. Business overdrafts are commonly secured by property (often called OD against property), by fixed deposits or securities, or sometimes offered unsecured based on cash flows. There is usually no monthly drawing power calculation. Your available limit is the sanctioned amount, sometimes reducing over the tenure.
What are the key differences?
| Factor | Cash credit | Overdraft |
|---|---|---|
| Primary security | Hypothecation of stock and receivables | Property, FDs, securities, or unsecured |
| How much you can draw | Lower of limit and monthly drawing power | Up to sanctioned limit |
| Monthly reporting | Stock and book debt statement | Usually lighter |
| Best for | Trading, manufacturing, distribution with stock and debtors | Service businesses, developers, businesses with collateral but light inventory |
| Interest | On daily outstanding balance | On daily outstanding balance |
| Review | Typically reviewed and renewed annually | Annual review or reducing limit, depending on structure |
| Assessment basis | Working capital cycle, turnover, current assets | Collateral value and cash flows |
How is interest calculated on CC and OD?
In both, interest is charged on the daily outstanding balance, not on the full limit. A common method:
Interest for the month = sum of daily outstanding balances × annual rate ÷ 365
Banks usually debit interest monthly. Some charge a commitment or unutilised limit fee on the part of the limit you don't use. Check the sanction letter and the key facts statement your lender provides.
Worked example
Illustrative numbers. Assume a ₹1 crore limit and an annual rate of 10%, assumed for the arithmetic only and not a market quote.
| Days | Outstanding | Days × outstanding |
|---|---|---|
| 1 to 10 | ₹40 lakh | ₹4.0 crore-days |
| 11 to 20 | ₹80 lakh | ₹8.0 crore-days |
| 21 to 30 | ₹20 lakh | ₹2.0 crore-days |
| Total | ₹14.0 crore-days |
Interest = ₹14 crore × 10% ÷ 365 ≈ ₹38,356 for the month.
A term loan of ₹1 crore at the same rate would cost about ₹82,192 for the same 30 days, because interest runs on the full amount. That gap is the main reason to use revolving credit for fluctuating needs.
How is drawing power calculated in a cash credit?
A simplified version:
Drawing power = (Stock − margin on stock) + (Eligible debtors − margin on debtors) − Creditors for goods
- Stock: valued at cost or market, whichever is lower, as per the bank's policy.
- Eligible debtors: usually only receivables up to a certain age. Older dues are excluded.
- Margins: set in the sanction, so the bank does not finance 100% of current assets.
- Creditors: unpaid suppliers are deducted, because that stock is not yet paid for.
If DP falls below your outstanding, you must bring the account within DP. See how banks calculate your working capital limit for the full method.
Which one should you choose?
Choose cash credit if:
- Your business carries meaningful stock and receivables.
- Your need moves with your trading or production cycle.
- You can submit accurate monthly stock statements.
Choose overdraft if:
- You have property or other collateral but little stock.
- Your business is service-led, project-led, or lumpy, as with real estate developers.
- You want lighter monthly reporting.
Many businesses use both: a CC for the trading cycle and an OD against property for flexibility.
What rules protect borrowers?
- Penal charges: RBI's circular of August 18, 2023 requires lenders to levy penalties for breaches of material loan terms as penal charges, not as penal interest added to the rate, and not to capitalise them. These rules applied to fresh loans from April 1, 2024.
- Key Facts Statement: RBI's circular of April 15, 2024 requires a standard KFS for retail and MSME term loans from October 1, 2024. For revolving limits, ask for a clear schedule of charges in writing.
What do lenders look for?
- A running business with a clear cash-flow cycle.
- Banking track record: account conduct, no frequent overdrawing beyond limits, no cheque bounces.
- GST returns consistent with bank credits.
- Security: current assets for CC, collateral for OD.
- Financial statements and, for larger limits, CMA data. See documents required for a business loan.
Can you have both a cash credit and an overdraft?
Yes. Many businesses run a cash credit against stock and receivables for the operating cycle, and a smaller overdraft against property or fixed deposits as a buffer. The two serve different purposes:
- The cash credit moves with your stock and debtors, so it grows as the business grows.
- The overdraft is fixed by the security, so it stays available even in a month when stock and debtors are low.
Worked example: combining both
Illustrative numbers. A distributor has a ₹2 crore cash credit and a ₹50 lakh overdraft against a fixed deposit. In a slow month, drawing power on the cash credit falls to ₹1.4 crore because debtors are low, while a supplier payment of ₹1.7 crore is due. The distributor draws ₹1.4 crore on the cash credit and ₹30 lakh on the overdraft, pays on time, and repays the overdraft when collections come in.
What does renewal involve?
Cash credit limits are usually reviewed every year. The bank asks for updated financials, stock statements and projections, and reassesses the limit. Late renewal can lead to the account being flagged in the bank's monitoring, so submit papers before the due date. Overdrafts against deposits often follow the deposit tenor, while property-backed overdrafts may be reviewed yearly. See how banks calculate your working capital limit.
How MoneyKarma helps
MoneyKarma is a loan distribution platform, not a lender. We map your working capital cycle and collateral across 90+ lender partners to the right CC, OD or working capital structure, and coordinate with the lender you choose. The lender makes the credit decision. See working capital and loan against property, or share your requirement.