Cash Credit vs Overdraft: Choosing the Right Working Capital Facility

Cash credit (CC) and overdraft (OD) both let a business draw funds up to a limit and pay interest only on utilisation. The difference lies in what secures the limit and how the usable amount is determined.

A CC limit is secured by current assets — stock and book debts — and the usable amount moves monthly with drawing power. An OD is typically secured against fixed collateral such as property or deposits, and the limit stays constant regardless of inventory levels.

Manufacturers, traders and processors whose funds are locked in inventory and receivables generally suit CC. The facility grows with business activity at renewal, and banks price it as core working capital.

The obligation that comes with it: monthly stock and debtor statements, annual renewals with audited financials, and stock audits above certain limits.

Service businesses with few current assets, professionals, and firms wanting minimal reporting suit property-backed OD. Limits are stable, documentation is lighter, and the facility doubles as a liquidity reserve.

The trade-off is capital efficiency: the limit is capped by collateral value rather than business growth, and unused property equity is tied up.

Interest on both is computed on daily outstanding balances — so treasury discipline matters more than the headline rate. Routing collections through the CC/OD account daily can reduce effective interest cost by 10–20% without any renegotiation.

Many mid-sized businesses ultimately run a blend: a CC limit sized to the operating cycle plus a property-backed OD as a strategic buffer. Structuring that blend across the right lenders is where advisory adds measurable value. Rates and terms vary with borrower profile, lender policy and market conditions.