Cash Credit and Overdraft

Both cash credit and overdraft are operating accounts through which a borrower if he or she desire can withdraw funds as and when needed up to the credit limit given by the banker to him or her. Under this the borrower can repay the amount anytime, and interest will be charged on amount borrowed and not on the credit limit sanctioned by the bank to the borrower.

This form of borrowing is extremely useful to the borrower because under this borrower can draw the amount as and when required by him and also he has to pay only interest on the amount which he has withdrawn and not on full amount which is sanctioned therefore providing flexibility to the borrower. The difference between cash credit and overdraft is that while under cash credit the security is inventory of the company while under overdraft security is generally the fixed assets of the company (sometimes bank give overdraft facility to the company without any security which is called clean overdraft facility).

Cash credit can of two types, one is key cash credit, in which the possession of goods will be with the banks and other is open cash credit, in which the possession of goods will be with the borrower and not with the bank.

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