To make operations its strength, a company should finance the working capital in the best way possible.
Cash Credit (CC) and Overdraft (OD) are types of short-term debt a company can rely on to take the burden off their finance department. They give a chance to companies to meet unexpected expenses and have enough liquidity.
Another good thing is that fulfilling the eligibility criteria and documentation is not a very daunting task.
To understand their importance in short-term financing, we should know what are CC and OD in the first place?
CC and OD are facilities which allow companies or individuals to borrow some amount from the bank and use it for financing the day to day operations.
The amount withdrawn has a predetermined limit which is set by the bank itself. The interest paid is only on the amount withdrawn not on the entire limit. Although they both look similar some factors make them distinct from each other.
So, let’s start with drawing a line between the two.
- Collateral: In thecase of OD, the collateral is tangible i.e. the facility is given against a fixed asset whereas cash credit is given on the inventory stock you hold such as raw material, work in progress and finished goods.
- Availability: OD facility can be used by both individuals and businessmen but a CC is given only to businesses.
- Limit of Drawn amount: For CC this amount is calculated by the formula “Stock + Book Debts – Credit” which is equal to Drawing Power (the maximum loan amount that can be withdrawn under CC). For OD, the amount is decided on the basis of your financial statements.
- The account used to pay: OD uses the existing current account of the borrower and in thecase of CCat times a new account created.
- For individuals: A minimum monthly salary set by the bank, to apply for OD. For example, HDFC Bank sets a minimum salary of Rs 15000 for their OD facility.
- For businessmen:
- Thebusiness should be running since minimum 3 years
- The financial statements of last 3 years are assessed to determine eligibility.
- The business should be running since minimum 3 years.
- Drawing power is calculated to determine the maximum loan limit.
Documentation: Documents required are generally the same for both
- KYC (Know Your Customer) documents:
- Pan Card (mandatory) as ID proof
- Aadhar Card/ Electricity Bill as Address Proof
- ITR (Income Tax Return) of last 2-3 years.
- Bank Statement of last 6 months.
- Collateral asset proof.
- Various options are available to suit the needs of the customer. A few suchexamples are listed below.
- ICICI Bank has an overdraft facility to assist the rural enterprises called Agri Credit Line.
- Another special facility is for people with a salary account and a home loan in the bank called the “Home Overdraft” facility. It allows a maximum amount of 1 crore.(Further, all banks have different variants of the above examples.)
- They save the small and medium enterprises from drowning due to lack of short-term funds.
- They are easily available and have a quick processing time.
- These are appropriate choices for the business where the amount of funding required cannot be estimated.
These insights will help you choose which one is best suited for your business. If you belong to the salaried class there are various sub-options of the OD facility.
Thus, whenever you get stuck in a web of problems related to short-term financing you know there is a way out. Say goodbye to your worries with these two incredible saviors.