What is an Overdraft (OD) Account?

• An overdraft is an extension of credit from a lending institution that is granted when an account reaches zero. 
• The overdraft allows the account holder to continue 
• withdrawing money even when the account has no funds in 
• it or has insufficient funds.
• Example:
  Mr. Jones has Rs.5,000 in his account and writes a Rs.5,500 cheque. The bank allows him to overdraw his account to cover the cheque, thus rendering his balance to -$50.

What is a Cash Credit Facility?

• A Cash Credit (CC) is a short-term source of financing for a company. 
• In other words, a cash credit is a short-term loan extended to a company by a bank. 
• It enables a company to withdraw money from a bank account without keeping a credit balance. 
• The account is limited to only borrowing up to the borrowing limit

How to avail the benefit of OD or CC?

• Overdraft can be availed on the existing current account. It is a facility of “excess withdrawal” given in the current account and at times even in the savings account.
• One needs to usually open a separate cash credit account with a bank to avail cash credit facility.

Do we need to attach any security to avail the Benefit of OD?

• Overdraft facility does not necessarily require current assets as security. 
• An overdraft facility may be extended by taking shares, other investments like FDs, insurance policies as security.
• At times even based on the credibility of the person, overdraft limits may be approved.

Do we need to attach any security to avail the Benefit of CC?

• Company inventory and receivables are usually taken as security for allowing cash credit facility.

Is the usage of benefits restricted?

• Overdraft Facility can be used for any purpose and not necessarily for business.
• This is generally given specifically for the purpose of the business operation (as working capital).

What is the Rate of Interest that is charged against the utilization of Benefit?

• The rate of interest charged under the overdraft facility is higher than what is usually charged under the cash credit facility.
• The rate of interest charged under the cash credit facility is lesser than what is usually charged under the overdraft facility.

COMMON POINT:

• The interest is calculated on the amount that is utilised but not the amount that is allowed as the borrowing limit.

Example:

• If the amount that is allowed as the borrowing limit for Mr. X is Rs.25 lacs but the amount that he utilised is only Rs.10 lacs, then the interest will be calculated on the amount that is utilised i.e.,Rs.10 lacs but not the amount that is allowed i.e.Rs.25 lacs.

How the limit that can be availed is calculated?

• The limit is usually allotted taking into consideration the assets collateralized and also on the basis of financial statements of the company.
• The limit is usually a percentage of the stocks or receivables.