Overdraft Facility vs Cash Credit: What Is the Difference
Published 30 September 2026 · 5 min read · Clean EMI Editorial
Both overdraft and cash credit let you draw money up to a sanctioned limit, repay when you can and pay interest only on what you use. They are often confused, but they differ in what secures them and who they are built for. The right one depends on how your business holds its working capital.
What they have in common
Each is a revolving facility attached to a current account. You can withdraw and deposit repeatedly within the limit, and interest is charged on the day-to-day outstanding balance rather than on the full limit. Both suit short-term cash needs, unlike a fixed-term loan. For that contrast, see working capital loan vs term loan.
Cash credit
A cash credit limit is typically secured by hypothecation of your stock and receivables. The amount you can draw at any time is the “drawing power,” which is calculated from the value of current assets and is reviewed by the bank through periodic stock statements. It is mainly used by traders and manufacturers with inventory and debtors.
Overdraft
An overdraft is usually secured by something else, such as a fixed deposit, property or securities, and is available to a wider range of borrowers, including professionals and proprietors who do not hold much stock. The limit is generally fixed against the security rather than a moving drawing power.
Choosing between them
- Holding stock and debtors that change often points to cash credit
- Having a deposit, property or other security and needing flexible cash points to overdraft
- Needing a one-time purchase, such as equipment, points to a term loan instead
Pricing, renewal terms and any commitment or non-utilisation charges vary by bank, so compare them in writing.
Keep the account active
Both facilities are reviewed and renewed regularly, and banks watch how the account is run. Steady credits and regular turnover support renewal, while an account that sits at its limit for long periods can raise concerns. Start from the MSME Business Loan page, available through PSU banks including Bank of Maharashtra.
Frequently Asked Questions
Do I pay interest on the whole overdraft or cash credit limit?
No. Interest is normally charged on the amount you actually use each day, though some banks charge a fee on any unused portion.
Which is cheaper, overdraft or cash credit?
It depends on the bank, the security and your profile. Compare the quoted rate and all charges for each.
What is drawing power?
It is the maximum you can withdraw from a cash credit account at a given time, calculated from the value of your stock and receivables and updated through stock statements.
Are these facilities renewed automatically?
No. The bank reviews them periodically, usually each year, and renewal depends on how the account has been conducted.
Useful free tools
- Free Credit Analyzer — Upload your CIBIL report and see which loans you may be eligible for, with an indicative EMI.
- Check my Loan Eligibility — Answer a few questions and see how your application would be routed to a PSU bank.
- Home Loan Balance Transfer Calculator — Compare your current EMI with a lower-rate loan over the same remaining tenure.
- Credit Score Enhancer — Practical steps to improve your CIBIL score before you apply for a loan.
Ready to check your eligibility?
No fee to apply. CIBIL score of 700 or above required.