Key takeaways
- Both facilities let you draw and repay within a limit, with interest usually charged only on what you use.
- Cash Credit is tied to stock and receivables, so the amount you can draw moves with your drawing power.
- An overdraft is usually backed by a deposit, a property or the account’s track record, with lighter monitoring.
- Look beyond the interest rate to fees, inspection costs and penal charges.
- Stay within your limit and keep the account active, because a limit left overdrawn can hurt your credit record.
What the two facilities have in common
Cash Credit (CC) and overdraft (OD) are both revolving limits. The bank sanctions a limit, and you draw money when you need it and repay when cash comes in. There are no fixed EMIs. Interest is usually worked out on the daily balance you use, not on the full limit.
Both are meant for running costs such as stock, supplier bills, salaries and gaps while customers pay. Both are usually reviewed every year. The difference lies in what backs the limit and how closely the bank watches it. See how LoanBazzaar helps businesses compare both on our page about Cash Credit limits in Lucknow.
How Cash Credit works
Cash Credit is the classic working capital limit for traders, distributors and manufacturers. The bank sets the limit from your working capital need: the stock you hold, the money customers owe you and the credit your suppliers give you.
You cannot always use the full limit. What you can draw at any time is your drawing power, worked out from your latest stock and receivables statement after the bank’s margin. Receivables older than the bank’s cut-off usually do not count. If drawing power is lower than the sanctioned limit, the lower figure applies. Our short answer on what drawing power means sums it up.
Most banks want a stock and receivables statement every month and may inspect your stock or ask for a stock audit. A late or incomplete statement can cut your drawing power.
A drawing power example
These figures are illustrative, and each bank uses its own formula and margins. Say a trader has a sanctioned limit of ₹25 lakh. The month-end statement shows stock of ₹20 lakh, receivables of ₹10 lakh, all within the bank’s age limit, and unpaid supplier bills of ₹6 lakh.
The bank takes stock plus receivables, less what is still owed to suppliers: ₹24 lakh. It then keeps a margin, say 25%, which leaves drawing power of ₹18 lakh. So this month the trader can use up to ₹18 lakh, not the full ₹25 lakh. If stock or receivables grow, drawing power can rise again, up to the sanctioned limit.
How an overdraft works
An overdraft lets you withdraw more than the balance in your current account, up to an approved limit. It usually needs no monthly stock statement, which suits service businesses, professionals and traders who hold little stock.
Some property-backed limits reduce on a fixed schedule, called a dropline overdraft, so check how yours will change. What backs an overdraft varies:
- A fixed deposit, where the limit is a share of the deposit and the deposit keeps earning interest
- A residential or commercial property, often for larger limits
- The business’s banking record and financials, for some unsecured limits
Cash Credit and overdraft compared
Use this as a quick guide. Each lender sets its own terms.
- Suits: CC for businesses that hold stock and sell on credit; OD for service firms, professionals or owners with a deposit or property to offer
- Basis of the limit: CC on your working capital cycle; OD on the security or the account’s track record
- Usable amount: CC moves with drawing power; OD is usually the full limit, unless it reduces on a schedule
- Monitoring: CC needs regular stock and receivables statements; OD needs much less
- Security: CC is usually secured by stock and receivables, often with extra collateral; OD by a deposit, property or other security
- Interest: on the amount you use in both cases, at a rate the lender sets for your profile
What a limit really costs
Interest is only part of the cost. As an illustration, at 11% a year, using ₹10 lakh for 15 days and ₹18 lakh for the next 15 days costs about ₹12,658 in interest for that month. Keeping the full ₹18 lakh drawn for all 30 days would cost about ₹16,274. Repaying whenever cash comes in keeps the bill down.
For limits sanctioned or renewed from 1 January 2026, RBI rules say no prepayment charge applies when you close a CC or OD limit on its due date, if you told the bank in time that you do not want to renew it. Check these other charges in the sanction letter:
- Processing fees on sanction and on each renewal
- Stock audit or inspection charges
- Charges on unused limits, where the bank levies them
- Penal charges for going over the limit or sending statements late
- Charges for closing the limit before its due date
Which one fits, and how to keep it healthy
Choose Cash Credit if you carry stock, sell on credit and can send accurate monthly statements. Choose an overdraft if your need is short and irregular, or you have a deposit or property to offer and little stock. For a one-time purchase such as a machine, a business loan repaid in EMIs may fit better, as our guide to business loans vs personal loans explains. Compare its EMI in our EMI calculator.
Once you have a limit, route sales through the account, send statements on time and stay within your limit and drawing power. Under RBI rules, an account that stays over its limit or drawing power for 90 days in a row, or gets too few credits over 90 days to cover the interest, can be classed as a non-performing asset. That hurts your credit record and future borrowing. The bank decides the limit, the drawing power and the terms.
Relevant loan assistance
Need a working capital limit?
Share your turnover, stock, receivables and banking. A LoanBazzaar advisor explains your CC and OD options from all major banks and loan providers and the papers to prepare.
Sources
How we write our guides
The LoanBazzaar editorial team writes these guides around the questions borrowers ask us most, in plain language. We update them when rules or common lender practice change. Spotted an error or something out of date? Tell us.
