Working Capital Loans in India: Cash Credit, Overdraft and Term Loan Compared
Choosing the wrong loan type costs money. Here is how cash credit, overdraft and term loans differ.
Businesses borrow for two very different reasons: to fund day-to-day operations (stock, receivables, expenses) and to buy long-lived assets (machinery, premises). Matching the loan type to the purpose keeps interest costs down and cash flow healthy.
The main options
| Facility | Used for | How it works | Interest charged on |
|---|---|---|---|
| Cash credit (CC) | Working capital against stock and receivables | A limit set by the bank; you draw and repay as needed | The amount actually used |
| Overdraft (OD) | Short-term needs, often against security such as a deposit or property | You can withdraw beyond your balance up to a limit | The amount actually used |
| Term loan | Machinery, premises, expansion | Fixed amount repaid in instalments over a set tenure | The outstanding balance, with EMIs |
Cash credit
The limit is usually set by looking at your stock, receivables and projected turnover, and the amount you can draw is often tied to the value of current assets. Banks review it each year. A rough rule banks use for smaller borrowers is described in our guide on project reports and DSCR.
Overdraft
Overdrafts are flexible and suit seasonal or short-term gaps. Because they are often secured, they can carry lower rates than unsecured options, but the limit is tied to the security offered.
Term loans
A term loan funds assets that will earn for years, so the repayment period should match the asset’s useful life. Learn how instalments are worked out in our article on how EMI is calculated.
Choosing the right one
- Use cash credit or overdraft for stock and receivables, not for buying machinery.
- Use a term loan for assets, not to cover monthly cash shortages.
- Avoid keeping a cash credit account permanently at its limit, since banks may view it as a sign of stress.
What banks usually ask for
- Financial statements and tax returns for recent years, and projections.
- Bank statements and GST returns showing turnover.
- A project report for new term loans.
- KYC, security and, where applicable, Udyam registration. See MSME and Udyam registration.
Try our loan projection tool to test repayment capacity before you apply.
Frequently asked questions
What is the difference between cash credit and overdraft?
Both let you draw up to a limit and pay interest on the amount used. Cash credit is generally for business working capital against current assets, while overdraft is often secured by deposits or property.
Can I use a term loan for working capital?
It is possible, but repayment instalments can strain cash flow. Working capital facilities fit day-to-day needs better.
Is interest charged on the full limit?
Generally on the amount actually used, though banks may charge fees on the sanctioned limit.
Do I need a project report for a cash credit limit?
Banks mostly rely on financial statements and projections for existing businesses, and a project report for new ventures.
This article is for general information only and is not tax, legal or financial advice. Rules, rates and criteria change and vary by lender, so confirm the latest position with the official source or your lender before acting.
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