Overdraft (OD) and Cash Credit (CC) limits are popular short-term financing options that businesses can use to manage their cash flow needs. They are essentially credit lines provided by banks and other financial institutions to help businesses maintain their operations during periods of low cash flow or seasonal fluctuations.
In this article, we will explore what OD/CC limits are, how they work, and the benefits they offer to businesses. We will also discuss the key differences between OD and CC limits, as well as the documentation requirements, interest rates, and application process.
What are OD and CC Limits?
Overdraft (OD) limits and Cash Credit (CC) limits are two types of credit facilities provided by banks to businesses. They are both short-term financing options that can help businesses manage their working capital needs.
An OD limit is essentially a credit line provided by a bank that allows a business to withdraw more than what is available in their bank account. It is a type of loan that can be used for various purposes, such as purchasing inventory, paying suppliers, or meeting payroll expenses. The amount of the overdraft limit depends on the creditworthiness of the borrower and the collateral provided.
A CC limit, on the other hand, is a type of revolving credit line that allows businesses to draw funds as needed up to a predetermined limit. It is similar to a credit card, in that the borrower can borrow and repay funds as needed, without having to reapply for the loan each time. The interest is charged only on the amount drawn and not on the entire limit.
How Do OD and CC Limits Work?
Both OD and CC limits are designed to provide businesses with short-term financing options to manage their cash flow needs. They work differently, but the basic principle is the same - the borrower can access funds as needed up to a predetermined limit.
When a business applies for an OD or CC limit, the bank evaluates the business's creditworthiness, financial statements, cash flow projections, and other factors to determine the amount of the limit. Once the limit is approved, the borrower can draw funds as needed up to the limit.
For OD limits, the borrower can withdraw funds from their bank account even if there is not enough balance in the account. However, the interest rate charged on the overdraft is higher than the interest charged on other types of loans.
For CC limits, the borrower can draw funds as needed up to the limit, and interest is charged only on the amount drawn. The borrower can repay the borrowed amount at any time and reuse the limit without having to reapply for the loan.
What are the Benefits of OD and CC Limits?
OD and CC limits offer several benefits to businesses. Some of the key benefits include:
- Easy Access to Funds: OD and CC limits provide businesses with easy access to funds whenever they need it. This helps businesses to manage their cash flow needs and maintain their operations even during lean periods.
- Flexibility: Both OD and CC limits are flexible financing options that can be used for various purposes, such as purchasing inventory, paying suppliers, or meeting payroll expenses.
- Interest Only on Amount Drawn: For CC limits, the interest is charged only on the amount drawn, which means that businesses can save money by borrowing only what they need.
- Repayment Flexibility: OD and CC limits offer repayment flexibility, which means that businesses can repay the borrowed amount at any time and reuse the limit without having to reapply for the loan.
- Customized Loan Options: Banks can work with businesses to create customized loan packages that fit their unique financial situation and goals.
What are the key difference between OD and CC limits?
OD (Overdraft) and CC (Cash Credit) limits are two types of credit facilities that banks and other financial institutions offer to businesses. Though they are both used to manage cash flow needs and provide short-term financing, there are some key differences between the two.
Nature of Credit Facility:
The primary difference between OD and CC limits is the nature of the credit facility. OD limit is a type of loan that allows the borrower to withdraw more than what is available in their bank account. The borrower pays interest on the amount withdrawn. In contrast, CC limit is a type of revolving credit line that allows the borrower to withdraw funds as needed up to a predetermined limit. The borrower pays interest only on the amount withdrawn.
Interest Rates:
The interest rate charged on OD limits is generally higher than that on CC limits. This is because OD limits are unsecured loans, while CC limits are secured loans. The lender charges a higher interest rate on unsecured loans to compensate for the higher risk involved.
Repayment:
In the case of OD limits, the borrower is required to repay the borrowed amount along with interest within a specified period. The repayment terms may vary from lender to lender. In contrast, CC limits are more flexible in terms of repayment. The borrower can repay the borrowed amount as and when they have funds available. There is no fixed repayment schedule.
Collateral:
Collateral is required for both OD and CC limits. However, the nature of collateral may differ. In the case of OD limits, collateral may not be required for smaller amounts. But for larger amounts, banks generally require collateral in the form of assets such as property, stocks, or bonds. In contrast, CC limits are secured by current assets such as inventory or accounts receivable.
Documentation:
The documentation required for OD and CC limits may vary from lender to lender. However, in general, OD limits require more documentation than CC limits. The documentation required for OD limits may include financial statements, tax returns, and bank statements. CC limits, on the other hand, may require only basic documentation such as proof of ownership of current assets and bank statements.
Limits:
The limit for OD and CC facilities varies depending on the lender, the borrower's creditworthiness, and the collateral provided.
- Cash Credit (CC) Limit: 50-60% of the value of inventory and receivables.
- Unsecured Overdraft (OD) Limit: At the discretion of the bank.
- Secured Overdraft (OD) Limit: 60-85% of the value of the security.
Conclusion:
In conclusion, OD and CC limits are both useful credit facilities for managing short-term financing needs. While they share some similarities, they differ in terms of the nature of the credit facility, interest rates, repayment terms, collateral, documentation, and limits. It is important for businesses to understand the differences between the two and choose the option that best suits their needs.
ZustLoan Banking Finance is here to assist businesses in finding the best OD and CC limits by analyzing their financial requirements, comparing different lenders, negotiating favorable terms, streamlining the application process, and providing post-approval assistance. This can help businesses obtain the necessary funding they need to manage their cash flow and grow their business.
