A businessman has two options while taking a loan for his business.
Either to opt for long term funding like LAP (Loan
against property) or to go for flexible funding like Cash Credit (CC) or
Overdraft (OD). Long term funding generally carries a lower rate of interest while flexible
funding gives opportunity to save interest by depositing extra funds in the account and thus
paying interest only for amount needed.
Points to be considered while taking a CC or OD account
facility
- Rate of
Interest – Rate of
interest is higher than fixed loans like Loan against property (LAP) therefore
if you generally don’t have extra money to park in cc or od account then you
should opt for LAP.
- Processing
fees – Processing fees
charged by bank is normally .5% to .75% and could bargain on it.
- Minimum
usage condition – Some bank levies
charges if the cc or od account is not utilized upto a certain limit. For
example you take an OD account of Rs. 10 lakhs and average use during the year
is not 30% i.e Rs. 3 lakh then charges are levied.
- Account
closing charges – Some banks also
levies a percentage of loan amount as charges called foreclosure charges if you
want to close the account. This generally ranges from 1% to 2%. If your bank
levies 2% foreclosure charges then its not beneficial for you to shift to other
bank even if other bank gives you a better interest rate.
- Interest
Servicing – Some banks required
the customers to deposit the interest of the month in the account through cash
or cheque deposit within a few days of the next month.
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Differences between Cash Credit and Overdraft Account
Overdraft and Cash Credit account both are the type of
loan accounts in which the account holder can withdraw the amount he requires . These
generally are considered as similar type of loan by many,yet there are some differences
between them.
Cash Credit Account:
- It is normally given on security of stock, debtors etc.
- The maximum amount is calculated as a percentage of sale and stock along with
financial statements. For eg A bank allowed cash credit upto 80% of stock plus 20%
of sales.
- It should be used for the purpose of business.
- Balance Sheet, P & L account , VAT reports is required be submitted to bank
generally annually or quarterly.
- It doesn’t reduce over time.
- Insurance of stock is normally required.
- Many a times new account has to be opened to take cash credit
facility.
- Interest rate is normally lower than overdraft account.
Overdraft Account:
- It is normally given on security of a fixed asset.
- The maximum amount allowed is calculated mainly on basis of financial statements and
security.
- It should be used for the purpose of business.
- Financial statements are generally not required to be resubmitted after approval.
- There is a monthly reduction in amount of overdraft protection in Dropdown Overdraft
(DOD).
- Insurance of the property is generally required.
- Overdraft is generally started by banks in existing current accounts.
- Interest rate is normally higher than cash credit account.
What are the documents required for OD/CC Limits
For Self-Employed/Professionals:
- KYC Documents
- Duly filled in application form signed by the customer
- 2-3 years audited ITR - compulsory in case of unsecured loan
- Bank account statement of last 6 months
- PAN card/Form 60
- Business Proof
Frequently Asked Questions
The loan amount offered by financial institutions depends on the
volume of stocks and receivables possessed by a unit.
Yes, banks require collateral security of residential and commercial
properties before sanctioning the Cash Credit limit.
All individuals, manufacturers, traders, retailers, distributors,
companies, partnerships, sole proprietorships, LLPs, trusts, societies can apply
for a cash credit loan.