Cash credit and overdraft are two types of short-term funding that financial institutions offer to their customers. These are mainly used to avoid checks from bouncing or debit cards from being declined when there are insufficient funds in checking accounts. Cash credit may also be referred to as a cash reserve account.
Cash credit is a short-term working capital loan extended by financial institutions in which it enables the borrowers to make use of the money without holding a credit balance in an account. In this, a borrower can withdraw funds up to a limit of predetermined by the sanctioning institution as per the initial agreements.
Cash credit is usually offered to businesses contrast to individual consumers. Banks and credit unions generally require a business customer to put down a form of security as collateral in exchange for cash which can be tangible such as a stock or property. The credit limit of cash credit account will depend on the percentage of the value of the collateralized security. If the borrower doesn’t have sufficient funds in his/her account, one can use the cash credit for regular banking transactions up to the credit limit on interest basis.
Overdraft arises when money is withdrawn more than what is on the current account. In this regard, the account is said to be “overdrawn“. If there is a initial agreement with the lender for an overdraft, and the amount overdrawn is within the agreed overdraft limit then the normal interest charge is levied as per agreement. If the negative balance exceeds the agreed terms, then additional charges will be levied with high interest.
The process of granting short-term credit to an account holder when their balance drops below zero is known as overdraft protection. Overdraft will be common for overdraft protection to link two accounts which allows funds to automatically be drawn on a reserve account in the event of the primary account being drawn below zero. This feature can be useful in evading overdraft fees or having insufficient funds to conduct a transaction.