Cash credit and overdraft are two types of financing provided to their customers by financial institutions. Both are used to prevent bouncing checks or declining debit cards if insufficient funds exist in checking accounts.
Both cover inadequate funds, but usually one is used by businesses only whereas Overdraft can be provided to both Businessmen & Salaried.
Let’s start by understanding what each one means and how to avail the facility
What is Cash Credit and Overdraft facility?
Cash Credit (CC) is a short-term loan provided to businesses to meet their working capital needs, whereas Overdraft facility is financing provided by banks to individuals or businesses to for their Personal use or Business Use. Overdraft can be Secured or Unsecured. Unsecured Overdraft depends on the Income of the customer whereas in case of Secured Overdraft (Usually provided to Businesses) maximum amount is 60% of Property Value. In case of Cash Credit Bank can provide funding upto100% of Property value. Cash credit and overdraft are credit limits granted by a lender or bank. Both financial assets are used to borrow money by pledging inventory or financial statements as collateral.
We’ll now have a look at them individually:
CASH CREDIT
The features of cash credit facilities may differ depending on the lender you select. However, here is a general overview of its eligibility requirements.
- Almost all lenders have an age limit of 25.
- Years of business experience: This, too, varies depending on the lender you approach. Three years is the general recommendation.
- Certain lenders require you to have filed IT returns for at least a year. You must submit them alongside your loan application
- Working capital loans are available to sole proprietorships, partnerships, limited liability companies, and publicly traded companies. Certain lenders even limit the types of businesses that can apply for cash credit.
- To obtain a cash credit facility, you must provide collateral. Almost all lenders accept real estate as collateral. You could even use company assets for it.
Documents Required
- Financial statements certified by a chartered accountant
- Six-month bank statements
- One-year income tax returns
- Evidence of your collateral
- Documentation of your loan repayment (if applicable)
- Other documents that your lender might require
OVERDRAFT FACILITY
Eligibility criteria
Salaried
To be eligible for a Personal loan overdraft, you must meet the following criteria:
- Over the age of 25
- A monthly income of at least INR35000 is
- Should have been in the same job for at least six months
- At least two years of work experience is required.
Documents needed
- Copies of your last three months’ pay stubs
- Proof of income; last three months of bank statement
- Proof of identification
- Proof of your address
Self Employed
- Over the age of 25
- A monthly income of at least INR 50000 is required
- Should have been in the same business for at 3 years
- At least 3 years of work experience is required.
Documents needed
- Copies of your last three year ITR
- Last 1 year of bank statement
- Proof of identification
- Proof of your address
Key points to note :
- Understand your requirements: Do you really require a loan? Don’t put a strain on your finances by making rash purchases. Avoid the temptation to buy something expensive during the holidays.
- Perform your due diligence: Conduct extensive market research. Examine all of your options. As you are aware, information is now at your fingertips. Make the best of it. Make certain that you have done thorough research on factors such as repayment tenure. This ensures that you receive the loan with the lowest possible interest rate.
- Keep your borrowings up: loans are booming industries now. Of course, borrowing is now a fresh breeze. But don’t borrow more than you could afford, make sure. Calculate the income you have to pay and the EMI interest. The amount of your loan repayment should be no greater than 15 percent.
- Read the fine print: The total cost of your loan may not be disclosed by your lender. But the documents you must sign would be there. Please read the terms of reference. Note that the cost of a loan is supplementary charges.
- Choose the shortest term possible: The prospect of a long-term loan is enticing. However, it is not good for your bank account. For example, the interest rate on a short-term loan is 58 percent of the loan amount. In the case of a long-term loan, it can reach 128 percent. If a longterm loan is required, increase your EMI payment on an annual basis. You can do it in accordance with your rising monthly income.
- Keep a good loan value: this applies in particular to the short-term overdraft facilities available. Here, when determining your loan amount, the bank will evaluate your credit score. This may not be the case for those who use a long-term collateral loan.
- Please be aware of the fee: This varies from borrower to borrower. Ask before you take that last step.
To conclude, In India, cash credit and overdraft are the most popular financial products. These are simple to obtain and require little paperwork. These are the simplest ways for a diligent entrepreneur to expand their business.
