What Are Revolving Credit Facilities?
Unlike a traditional term loan where interest is charged on the entire disbursed principal from day one, Cash Credit (CC) and Overdraft (OD) are revolving limits. You only pay interest on the exact amount drawn and for the specific number of days utilized.
This makes revolving limits the most cost-effective tool for managing daily supplier payments, wage bills, and receivable delays.
Cash Credit (CC) Defined
Cash credit limits are sanctioned primarily against current business assets like raw material inventory, work-in-progress goods, and trade debtors (accounts receivable).
Borrowers must periodically submit stock statements and debtor aging reports to determine their permissible 'Drawing Power' (DP) based on agreed margin deductions (typically 25% on stock and 30%–40% on debtors under 90 days).
Overdraft (OD) Defined
Overdraft facilities allow account holders to withdraw beyond their zero account balance up to a pre-approved sanctioned ceiling.
Overdrafts can be secured (backed by financial assets like fixed deposits, mutual funds, life insurance policies, or immovable property) or clean/unsecured based on strong historical cash flow tracks.
Key Comparison Summary
Key Takeaways for Borrowers
- ✓Both CC and OD charge interest only on utilized capital on a daily balance calculation.
- ✓Cash Credit requires ongoing submission of verified stock statements to maintain drawing power.
- ✓Overdraft backed by property offers higher stability with simpler operational compliance.