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Small-business owners confuse cash credit and overdraft accounts and do not know how lenders read them in a statement.
Both are running limits with interest on daily use; cash credit is secured on stock and debtors through drawing power, overdraft on a deposit or property.
Track limit, drawing power, daily utilisation and the month-end interest debit; avoid balances beyond the limit or drawing power.
A clear view of utilisation and interest cost that matches how a lender assesses the account.
A cash credit (CC) account and an overdraft (OD) both let a business draw money up to a sanctioned limit and pay interest only on the amount actually used. The main difference is security. A CC limit is secured on the business’s stock and receivables, while an OD is usually secured on a fixed deposit, property or an existing banking relationship.
How do CC and OD differ?
| Point | Cash credit (CC) | Overdraft (OD) |
|---|---|---|
| Security | Hypothecation of stock and book debts | Fixed deposit, property, or unsecured for strong customers |
| Typical user | Traders and manufacturers holding inventory | Businesses and individuals needing short-term cover |
| Drawing power | Yes: based on monthly stock and debtors statement | Usually fixed at the limit, or a percentage of the deposit |
| Review cycle | Typically renewed every 12 months, stock statement monthly | Typically renewed every 12 months, or runs with the deposit |
| Interest basis | Daily balance used, debited monthly | Daily balance used, debited monthly |
| In the statement | Negative running balance, monthly interest debit, stock-linked limit | Negative running balance, monthly interest debit |
Against a fixed deposit, banks commonly allow an OD of around 80 to 90 percent of the deposit value, so a ₹10,00,000 deposit might support an OD of ₹8,00,000 to ₹9,00,000, but each bank sets its own percentage.
How does each look in a bank statement?
A CC or OD statement looks like a current account with a minus sign in front of the balance. Four things stand out to a lender:
- Running negative balance. A balance of −₹16,00,000 means ₹16,00,000 of the limit is in use.
- Month-end interest debit. One debit near the last working day, worked out on the daily balance.
- Limit and utilisation. The lender compares average use with the sanctioned limit. Use always near 100 percent suggests the business is stretched; use always near zero suggests the limit is not needed.
- Credits through the account. Customer receipts should flow through the CC account, so its credit turnover is a strong signal of real sales.
If the balance stays above the limit or drawing power for an extended period, RBI norms treat the account as out of order, and a cash credit or overdraft account that stays out of order for more than 90 days can be classed as a non-performing asset.
Worked example: interest on a ₹25,00,000 CC limit
A textile trader in Surat has a CC limit of ₹25,00,000 at 11 percent a year. In October her average daily balance used is ₹16,00,000.
- Yearly interest on ₹16,00,000 at 11 percent: ₹16,00,000 × 11 ÷ 100 = ₹1,76,000.
- For one month: ₹1,76,000 ÷ 12 = about ₹14,667.
So the month-end interest debit is about ₹14,667. If she had taken a term loan of the full ₹25,00,000 at the same rate, monthly interest would be about ₹22,917 (₹25,00,000 × 11 ÷ 100 ÷ 12), even when the cash sat idle. That difference of about ₹8,250 a month is why CC suits businesses with seasonal or uneven needs. Banks actually compute interest on each day’s balance, so the exact debit will differ slightly from this monthly estimate.
Her utilisation is ₹16,00,000 ÷ ₹25,00,000 = 64 percent, a comfortable middle range for most lenders.
Which one should a business choose?
Choose an OD against a deposit if you need short, occasional cover and have savings to pledge. Choose CC if you hold stock and sell on credit, because the limit grows with the business. CC comes with more paperwork, chiefly the monthly stock and debtors statement that sets drawing power, explained in the next article.
What to read next
- Next in this series: What is drawing power in a cash credit account?
- MSME working capital assessment from bank statements
- Synthetic balance sheet from MSME bank statements
- Bank statement analysis for MSME lenders
TransactIQ reads CC and OD statements for MSME lenders, including utilisation and interest patterns, as part of its 40+ engineered credit signals.