What is a Working Capital?
Working capital represents the funds available to a company for its day-to-day operations. It’s calculated by subtracting current liabilities (such as accounts payable) from current assets (such as cash, accounts receivable, and inventory). A positive working capital indicates that a company has enough short-term assets to cover its short-term liabilities. Adequate working capital is crucial for businesses to meet their short-term obligations, such as payroll, rent, and supplier payments.
What is a Overdraft (OD)?
An overdraft facility allows businesses to withdraw more money than they have in their bank account, up to a predetermined limit. It’s essentially a short-term borrowing arrangement provided by banks. Overdrafts are usually used to cover short-term cash flow gaps or unexpected expenses.
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What is a Revolving Credit?
Revolving credit is a type of credit facility that allows businesses to borrow up to a certain limit repeatedly, as long as they repay the borrowed amount and interest. Unlike a term loan, where the entire amount is disbursed upfront and repaid in fixed installments, revolving credit provides ongoing access to funds. Credit cards and lines of credit are common examples of revolving credit.
Difference between Cash Credit and Overdraft
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Cash Credit
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Overdraft
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Lower Interest Rates
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Higher Interest Rates
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Limit does not reduces over time
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Monthly reduction in the case of Overdraft
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Amount sanctioning is based on the business performance and market situations
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Overdraft Limit is sanctioned based on financial statements and security deposits
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Availed by individuals, retailers, traders, manufacturers,etc
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Availed by account holders of the respective bank
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To avail Cash Credit, a new account needs to be opened
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Overdraft facility is availed on the existing account of the applicant
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Similarities between Cash Credit and Overdraft
1. For Cash Credit and Overdraft, the lender’s interest rate is based on the amount of money actually used, not on the authorised amount or maximum.
2. Repayment of the overdraft amount and cash credit limit is due upon demand.
3. These two financial instruments are both provided in exchange for the security of existing assets.
4. In all situations, the maximum loan amount authorised stays set, and further funds cannot be taken out.
According to many, the two most important financial instruments for addressing both the immediate and long-term needs of a person or business are cash credit and overdraft. Although these two products have a similar appearance, they differ in a number of ways. Two of the most common types of company loans with the least amount of documentation needed are cash credit and overdraft.
2. Repayment of the overdraft amount and cash credit limit is due upon demand.
3. These two financial instruments are both provided in exchange for the security of existing assets.
4. In all situations, the maximum loan amount authorised stays set, and further funds cannot be taken out.
According to many, the two most important financial instruments for addressing both the immediate and long-term needs of a person or business are cash credit and overdraft. Although these two products have a similar appearance, they differ in a number of ways. Two of the most common types of company loans with the least amount of documentation needed are cash credit and overdraft.
FAQ'S
What is working capital, and why is it important for businesses?
Working capital refers to the funds a company needs to cover its day-to-day operational expenses, such as payroll, inventory, and utilities. It is crucial for businesses to maintain adequate working capital to ensure smooth operations and financial stability.
What is Cash Credit (CC) and Overdraft (OD)?
Cash Credit (CC) and Overdraft (OD) are forms of short-term financing provided by financial institutions to help businesses manage their working capital needs. CC allows businesses to withdraw funds up to a predetermined limit, while OD provides the flexibility to withdraw more than the available balance in the account, up to a specified limit.
How can Cash Credit (CC) benefit my business?
CC provides businesses with access to funds to meet short-term financing needs, such as purchasing inventory, managing cash flow fluctuations, and covering operating expenses. It offers flexibility in borrowing and repayment, making it suitable for managing working capital requirements efficiently.
What are the advantages of Overdraft (OD) for businesses?
OD offers businesses the flexibility to withdraw funds beyond the available balance in their accounts, up to a predetermined limit. It provides a buffer for unexpected expenses or temporary cash flow shortages without the need for frequent loan applications.
