Cash credit is backed by your stock and dues from customers; an overdraft is backed by property, a deposit or your record. Example: ₹50 lakh stock and dues with a 25% margin gives ₹37.5 lakh drawing power. JR Loan Advisors in Chennai helps businesses pick the right one.
What is the difference?
| Cash credit (CC) | Overdraft (OD) | |
|---|---|---|
| Backed by | Stock and money customers owe you | Property, fixed deposit, or your income record |
| How much you can use | Drawing power, which changes each month | A fixed limit, sometimes reducing each year |
| Papers each month | Stock statement | Usually none |
| Interest | Only on the amount used | Only on the amount used |
| Best for | Traders and makers with stock | Service firms, or owners with a property or deposit |
How is drawing power worked out?
Drawing power = (stock + money customers owe you − money you owe suppliers) × (100% − margin).
Example: stock ₹40 lakh + dues ₹20 lakh − supplier dues ₹10 lakh = ₹50 lakh. With a 25% margin, drawing power = ₹37.5 lakh. If your CC limit is ₹40 lakh, you can use only ₹37.5 lakh this month.
Which one should you pick?
- You hold stock and sell on credit: cash credit grows with your business.
- You have little stock but own a property: an overdraft against property.
- You have a fixed deposit: an overdraft against it is quick and cheap.
Where are the official rules?
Banks must state the rate and all charges up front (RBI Key Facts Statement rule). For how banks size the limit, read our working capital limit guide.
Not sure which suits you? WhatsApp +91 94450 93336.
Written and reviewed by CA Jitendraa Rathi, Chartered Accountant (CA membership number 217936) · Ex-banker, 20 years of experience in credit and lending · LinkedInLast reviewed · Expert review: CA Jitendraa Rathi (ICAI 217936)