OD (Overdraft) and CC (Cash Credit) are two common types of borrowing facilities provided by banks, but they differ in their nature and usage:
Nature:
Overdraft (OD): An overdraft is a facility that allows an individual or business to withdraw funds from their bank account even if the account balance is zero or negative. It is essentially a borrowing arrangement where the bank allows the account holder to withdraw more money than what is available in the account, up to a predetermined limit. Interest is charged only on the amount overdrawn.
Cash Credit (CC): Cash Credit is a type of working capital finance offered by banks to businesses. Under a cash credit facility, a predetermined credit limit is sanctioned to the borrower, and they can withdraw funds as needed within that limit. The interest is charged on the amount utilized, not on the entire credit limit.
Usage:
Overdraft (OD): Overdrafts are typically used for short-term financing needs or to cover temporary cash flow gaps. It provides flexibility to the account holder by allowing them to access additional funds as and when required, up to the approved limit.
Cash Credit (CC): Cash credit is primarily used by businesses to meet their working capital requirements, such as purchasing raw materials, paying suppliers, and managing day-to-day expenses. It is a revolving facility, and as the borrower repays the borrowed amount, the available credit limit is replenished, allowing for continued borrowing.
Security:
Overdraft (OD): Overdrafts can be secured or unsecured, depending on the creditworthiness and relationship of the borrower with the bank. For higher overdraft limits, banks may require collateral or security.
Cash Credit (CC): Cash credits are generally secured by collateral, such as inventory, accounts receivable, or other business assets. The collateral provides security to the bank in case of default.
