Cash credit and overdraft both let your business borrow against a sanctioned limit and pay interest only on what you actually use. The difference is what each facility is secured against and what it is built to do.
Cash credit is tied to your stock and receivables. It suits a business that holds inventory and waits on customer payments. An overdraft is usually tied to your current account, a fixed deposit, or property, and it suits short, irregular cash gaps.
If your money is locked in goods on the shelf and invoices not yet paid, cash credit is normally the right tool. If you have steady banking and need a buffer for occasional shortfalls, an overdraft often fits better. The rest of this guide explains why.
What is cash credit?
Cash credit (CC) is a working capital facility a bank gives against your current assets. Current assets means your stock and your trade receivables (money your customers owe you).
The bank sets a limit. You draw from it as needed and repay as money comes in. You pay interest only on the amount drawn, not on the full limit.
The limit is not fixed for the year. It moves with your business, because it is calculated on something called drawing power. More on that below.
What is an overdraft?
An overdraft (OD) lets you withdraw more from your account than the balance in it, up to an agreed limit. Like cash credit, you pay interest only on the overdrawn amount.
An overdraft is usually backed by your account history, a fixed deposit, or property. It is less tied to stock and invoices. Banks often offer it as a flexible top-up rather than a core working capital line.
The difference between cash credit and overdraft
The two facilities look similar on a bank statement. They differ in what backs them, how the limit is set, and who they suit.
| Basis | Cash credit | Overdraft |
|---|---|---|
| Secured against | Stock and receivables (current assets) | Account, fixed deposit, or property |
| How the limit is set | Drawing power from monthly stock and debtor statements | Fixed at sanction, against the security offered |
| Built for | Ongoing working capital in a business that holds inventory | Short, occasional cash gaps |
| Usual users | Manufacturers, traders, businesses with inventory | Service firms, businesses with steady banking |
| Limit behaviour | Moves month to month with current assets | Stays fixed until review |
| Documentation | Stock statements, debtor lists, often renewed yearly | Lighter; tied to the security pledged |
Both charge interest only on the used amount. Both are renewed periodically. The practical question is which one matches where your cash is stuck.
How the cash credit limit is set
Your cash credit limit is not a flat number. The bank works it out from your drawing power, which is the value of your current assets minus a margin the bank keeps for safety.
You submit a stock statement and a list of debtors, usually every month. The bank applies a margin (for example, it may fund 75% of your stock value and hold back 25%). The result is your drawing power for that month.
This is why a cash credit limit can fall in a slow month. If your stock and receivables drop, your drawing power drops with them. A business that understands this keeps its stock statements accurate and submitted on time, because a late or thin statement can quietly shrink the limit it can draw.
Which one fits your business?
Match the facility to where your working capital is tied up, not to which one the bank offers first.
Choose cash credit if you carry inventory and sell on credit terms. Your money sits in stock and unpaid invoices, and cash credit is designed to fund exactly that gap. Most manufacturers and traders run on a cash credit limit for this reason.
Choose an overdraft if your need is occasional rather than structural. A service business with low inventory and predictable receipts may only need a buffer for the odd shortfall, which an overdraft covers without the monthly stock reporting that cash credit requires.
Many growing businesses end up needing a primary cash credit line for working capital and a smaller overdraft for flexibility. There is no single right answer. It depends on your balance sheet and your cash cycle, which is the kind of thing worth talking through before you sign for a limit.
How Vibhuti Finserv helps
We assess your cash cycle and balance sheet, then structure the working capital facility that actually fits, and prepare the case file the lender needs. Sanction targets 48 to 72 hours once your documents are complete, subject to the lender’s credit assessment.
Check your eligibility or read more about our working capital services.
For a related read on getting the right help with a working capital case, see why a working capital consultant differs from your bank’s relationship manager.
Frequently asked questions
What is the main difference between cash credit and overdraft?
Cash credit is secured against your stock and receivables and is built for ongoing working capital. An overdraft is secured against your account, a deposit, or property and suits short, occasional cash gaps. Both charge interest only on the amount you use.
Which is better for a small business, cash credit or overdraft?
It depends on where your cash is tied up. If your money sits in inventory and unpaid invoices, cash credit usually fits. If you need an occasional buffer and have steady banking, an overdraft is often simpler. Many businesses use both.
Is interest charged on the full limit or only what I use?
In both facilities, interest is charged only on the amount you actually draw, not on the full sanctioned limit.
Why does my cash credit limit change?
A cash credit limit is set on drawing power, which is calculated from your stock and debtor statements minus the bank's margin. When your stock and receivables fall, your drawing power falls too, so the amount you can draw can change month to month.
Do I need to submit documents every month for cash credit?
Usually yes. Banks typically ask for a monthly stock statement and a list of debtors to recalculate your drawing power. An overdraft generally needs less ongoing reporting because it is tied to the security pledged rather than your current assets.