Skip to main content

Difference between Cash Credit and Overdraft


Cash credit: It is a short term loan provided by bank to the borrower. The borrower must have an account in bank. The bank charges interest on running balance of cash credit account not on loan limit. The amount is used to fulfil the working capital requirement of a company.

Overdraft:
The overdraft facility is provided by bank to its customers. This facility is provided to current account holders only. Under this facility the customers are allowed to withdraw amount more than the credit balance in his account. The bank charges some interest on amount withdrawal from bank. The interest amount is decided by bank according to the customer’s repaying capability.
The duration of the cash credit loan and bank overdraft is same that is approximately one year. Both cash credit loan and bank overdraft provided by bank to meet the financial need of a customers.

Let’s find out the difference between cash credit and overdraft:
Point of difference
Cash Credit
Overdraft
What is cash credit and overdraft?
It is a short term loan which is used to fulfil the working capital requirement.
It is provided by bank to its current account holder to withdraw amount more than the current account balances.
What are the types of cash credit and overdraft?
Cash credit is two types first is open cash credit and second is key cash credit. Open cash credit is one which is not under the possession of bank. Key cash credit in which the stocks are under the possession of bank.
Overdraft is two types first is secured overdraft and clean overdraft. In secured overdraft the assets are kept as security. In clean overdraft facility the assets are not kept as security.
Secured by assets or property
In cash credit loan is granted against assets by bank. In cash credit the inventory and receivables are kept as security against loan.
The overdraft facility is provided by bank to its current account holder. No assets are kept as security.
Is cash account needed in cash credit and overdraft?
In cash credit if borrower don’t have any current account then the bank first of all open the cash credit account which function as current account and then transfer the loan amount into the account and the bank provides the cheque facility to customer to withdraw the amount from account.
The current account is needed to use overdraft facility. Only current account holders use the overdraft facility.
Interest charged by bank in cash credit and overdraft
In cash credit the interest charged is less than the overdraft by bank.
The bank charges higher interest rate in comparison to cash credit loan provided by bank.
How to use cash credit loan and bank overdraft?
The cash credit loan is used to fulfil the working capital requirement of a company.
The overdraft facility is used by current account holder of a bank to fulfil any purpose of customer.
Repayment of cash credit loan amount and bank overdraft amount to bank
The loan amount is repaid in one year or a borrower can renew the loan for next period.
The overdraft amount is repaid when demanded by bank approximately in one year.






Comments

Post a Comment

Popular posts from this blog

How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of ...
88 comments
Read more

What is the difference between Cheque book and Pass book?

 Cheque book is issued by bank in customers / account holder request. With the help of this book account holder can withdraw cash from his/her account. Bank does not charge any fee to issued cheque book to its customer. But afterward bank charges some amount for using bank facility like cheque book, Debit card etc.So, Automatic some definite amount deducted from customer bank account. Pass book is  also issued by bank to its customer. It helps to record all the bank related activity according to date that is withdrawal and deposit. It is recorded by bank but the book is kept by customer to know the current balance of  his /her account.  Point of difference Pass book Cheque book What is the meaning of pass book and cheque book? Passbook is a book in which all withdrawal and deposit against customer account is recorded.   Cheque book is a book of cheques which are used to withdrawal the money to b...
Post a Comment
Read more

Numericals with solutions of Net income Approach

Net income approach questions and answers:   Questions:  Find out the value of the firm with the help of given information: Particulars Amount Earnings before interest and tax 3, 50, 000 Cost of equity 10% Cost of debt 7.2% Debenture 1,00,000 Find out the overall cost of capital with the help of net income approach. (Assume tax rate-10%) Solution: Particulars Amount Earnings before interest and tax 3, 50, 000 Less: Interest @7.2% 7, 200 Earnings before tax 3, 42, 800 Less: Tax@10% 34, 280 Net income 3, 08, 520 Cost of equity 10% Market value of equity (S =net income/ cost of equity) 30, 85, 200 Market value of debt (B) 1, 00, 000 Value of the firm (S+B) 31, 85, 200 Questions:  Find out the overall cost of capital if the equity capitalisation rate is 12...
Post a Comment
Read more