OD / CC Loan
An Overdraft (OD) and a Cash Credit (CC) loan are types of financial products that businesses often use to manage their working capital needs. Both are forms of revolving credit, meaning that borrowers can use and repay the funds as needed, up to a predetermined credit limit. Here's an explanation of each:
Nature: Cash Credit is a type of loan provided by banks to businesses to meet their working capital requirements.
Credit Limit: The bank assigns a certain credit limit based on the borrower's financial standing and creditworthiness.
Utilization: The borrower can withdraw funds up to the credit limit as needed. This makes it a flexible form of financing for meeting short-term operational expenses.
Interest: Interest is charged only on the amount utilized, not on the entire credit limit.
Security: The loan may be secured by the business's assets, such as inventory, receivables, or other collateral.
Renewal: Cash Credit is often a renewable facility, and the credit limit can be reviewed and renewed periodically.
Nature: An overdraft is a credit facility that allows the account holder to withdraw more money from their bank account than the available balance.
Credit Limit: The overdraft facility comes with a pre-approved credit limit. The borrower can withdraw funds up to this limit.
Utilization: Interest is charged only on the overdrawn amount. Once the account balance is restored to a positive level, the interest stops accruing.
Flexibility: Overdrafts provide flexibility, allowing businesses to manage temporary cash flow gaps.
Security: Overdrafts may be secured or unsecured, depending on the terms agreed upon with the bank.
Renewal: Overdraft facilities are often renewable, subject to periodic reviews by the bank.
In summary, both Cash Credit and Overdraft facilities are forms of short-term financing that provide businesses with flexibility in managing their working capital. They are particularly useful for handling fluctuations in cash flow and meeting day-to-day operational expenses. The key difference lies in the nature of the facility, with Cash Credit being a more structured line of credit often tied to specific assets, while an Overdraft is a more flexible arrangement linked to the borrower's bank account.
