Cash Credit Loan Account vs Bank Overdraft Facility से करें Business आसान - YouTube

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Namaskar, my name is Mukul

And you are welcome to the Asset Yogi

Where we unlock the knowledge of finance

In this video, we are going to talk about cash credit and overdraft facility

See when you run a business

Then the money is necessarily required. It is required in every business

As an individual too, we require money

Cash credit is that facility that can be used by the businesses

An overdraft facility is a facility that can be used by both businesses and individuals

What type of credit facilities are these?

Whether we talk about individuals or business

What is the difference between the both?

Many people think that cash credit limit and overdraft facility is the same thing

No, it's not like that. Both are different types of credit facility

So what is the exact difference

Between cash credit limit and overdraft facility?

What is the difference between their interest rates?

What type of loans do we get under the cash credit facility?

And what type of credit facility do we get in the overdraft facility?

We will understand these things in detail in this video.

So stay tuned with the video from the start till the end

So let's go straight towards the blackboard.

So first, we will understand what exactly is cash credit and overdraft?

If we talk about cash credit then

It is a type of short term loan generally provided to businesses and companies

For their working capital requirements

Working capital requirements means

Assume you have a manufacturing company

And you have to purchase the raw material and you don't have funds for that

So that can be your requirement. After that for maintaining the stocks

You may need some time

Till then you have to pay for your expenses

For that also, you may need money

You may have receivables

If we understand this with the example

Assume there is a solar manufacturing company

So if it wants to money to purchase raw materials

Then it will require money here

After that, the raw material will not be sold immediately

He will process and manufacture it

We will put that in work in progress

Whenever your raw material is in the warehouse for some time so let's say it is a cycle

Assume it's a 10-day cycle, after that it will go from work in progress to finished goods

So in this way, your panels will be made. This too has a period

We will assume that 10 days

Your finished goods will not be sold immediately

Whatever panels there are, they too have a cycle

Assuming they will be sold in 15 days and reaches to the customer

For customers, we will assume the marketing time as 15 days

We are talking about the average time

It can vary also

But if we talk about a company then there is the average time for everything

Maybe your customers will also give you money in 15 days

So 15+15+20,

The total number of days will be 50 days

We call it a cash cycle or we can also call it working capital cycle

So for managing this, whatever money you have in your company or factory is already spent

You are paying your staff, you are paying rent

So we call this a cash cycle

And for managing this, a loan will be granted to you

For managing this cash cycle

Either the owner has to invest from his pocket or the other option is the bank

And if you go to the bank then we call it cash credit

And you will get cash credit for maintaining the cash cycle

Every bank signs a limit of your cash credit

So you can withdraw that much money

Every day, every month, how much so ever you want, you'll get a running account

We will see that in detail that how it is operated

So this was about cash credit. Now we will talk about overdraft

Overdraft in a way is that you get money on your account

Assume you have a current account

Now overdraft is of two types

I will explain to you both

Assume you have a current account of your business in a bank

In that, your average balance is of 2 lakhs

Then the bank says that your relationship is quite good and you maintain your average amount quite good

The bank says that if you want then you can increase your limit

If you require money immediately

So we will give you an extra limit of 50,000 Rs

So this limit, the extra limit

We call it overdraft limit

So we get an overdraft facility in the current account

It depends on your relationship with the bank

What is your average balance?

And how is your relationship?

The second overdraft is

Assume you have an FD, LIC policy, or another type of security

Then you can get a loan against it

So this type of loan is called overdraft

The first overdraft is on the current account and the second is against the security

So we call it secured overdraft

This is your secured overdraft

And the first one I talked about is unsecured overdraft

Or we also call it clean overdraft

So these are the two types of overdraft

There is a difference between the two

You are getting cash credit only to fulfill your working capital

You can get an overdraft for any purpose whether it is a personal purpose

Individuals can also apply for FD and LIC

So as an individual if you want some money or loan

Then I have made videos in detail on this too

You can watch my loan against FD video

Loan against LIC, loan against mutual funds

I have made videos about this too

So you can watch that videos

How do we get those types of loans?

What are their features and eligibility requirements?

So now we will talk about their more differences

Cash credit is a type of secured loan

Whatever current assets you have, your inventory whether it is the raw material

Work in progress or finished goods. We call them inventory

If your payment doesn't come from the customers on time then we call it receivable

So it is a type of credit. You can get a loan against it

Cash credit is a type of loan

If you do default then the bank can sell your stock

And recover their money or they can recover the money by the receivables

Overdraft is basically of two types. We have already talked about them both

This is unsecured because in the current account there is no security

So you are getting the overdraft only based on your relationship

The second is a secured loan

FD, LIC policies, mutual funds

Or any other security against any financial instrument

You get an overdraft facility

What type of account do you have?

In your cash credit, a separate cash credit account is opened

There is no transaction limit in that

You can do as many transactions as you want on a daily or weekly basis

This is a type of running account. A cheque book is issued in this account

You can withdraw the amount from the cheque book.

And whenever you get the money your cash cycle gets completed so you can give the money back

And the interest is charged on that

Interest is charged on the number of days you took the money

In overdraft, no new account is opened. You can get this facility on your current account

As we have seen here, we got the extra limit of 50,000 Rs on 2 lakhs Rs

And the second option we saw is a secured loan

No separate account is opened in this.

You get a loan

Against your FD, LIC policy, or mutual funds

Or whatever security you have

Now we will talk about the purpose

So as we have seen that you get this only for purchasing and keeping inventory

Or only for your working capital

Or whatever your receivables are

If the customer hasn't paid on time, then you get a cash credit facility for that

You can use an overdraft loan for any purposes

Whether there is a personal requirement or business requirement

Individuals too can use the overdraft facility

If you have any FD, LIC policy, or mutual funds then you can take a loan against them

You can use that money however you want

As I said, I have already made videos about them

So watch those videos for sure

Now we will talk about the maximum limit. What can you get in a cash credit?

So whatever your total amount of inventory and receivables are

Assume your inventory is worth Rs 4 lacs and receivables are worth 1 lac Rs

So the total value is 5 lac

So 50 to 60% cash credit limit is sanctioned

Your CC limit is sanctioned

If we talk about this 5 lac, then approximately 2.5 to 3 lac cash credit limit will be sanctioned to you

In the case of a secured overdraft

Loan of 60% to 85% of security value will be assigned- overdraft

We talked about the security

Assume if we take an example

Your FD is 5 lac Rs

In the case of FD, up to 85% of loans can be sanctioned

We will say that you can get up to 4.25 lacs of loan

Against FD

And in the same way, if you talk about mutual funds

The equity funds under the mutual funds

Under that, less limit is sanctioned

Only 50% of the limit is sanctioned under that

Whatever your current net asset value will be

You will get only 50% of that

Then if we talk about unsecured overdraft

The limit on the current account we talked about. There is no limit to that.

Bank can decide your limit according to your relationship with the bank

Let's talk about the term.

The cash credit limit is assigned for one year

And they revise it annually

You get overdraft up to security term if we talk about the secured term

As we were talking about FD, your FD is left for 4 years

Then you will get a loan for 4 years

And if we talk about unsecured loan

Then you get the limit of 1 week to 1 month

We are talking about an unsecured current account

Now we will talk about if you want to make changes to the withdrawal limit

How difficult or easy is it?

As we talked about here if your cash credit limit is 2.5 to 3 lac. So that can change or not? -Yes.

If your inventories and receivables change then as their value increases or decreases

Your cash credit limit can be changed immediately

There is no problem with it.

But if we talk about the overdraft facility then it cannot be changed immediately.

Because you have to increase the average balance suddenly and it is not easy in the case of businesses to do this.

And the value of the FD in the case of the secured loan will be the same. Your overdraft limit cannot be changed immediately.

If we talk about interest rates then the interest charged in the cash credit is less.

Because this is a secured loan.

If there is a secured loan in the case of the overdraft

If you have taken the loan against the FD or mutual funds

Then your interest is less but if you are taking your overdraft limit on your current account

Then its interest rate is higher

Other charges are also levied.

There are no extra charges on the cash credit

You just have to pay the interest.

But if you've used the unsecured overdraft facility

Then the bank charges many extra charges against it

So you should know these things.

I have covered all the basic differences between cash credit and the overdraft

Whenever you require working capital against receivables or inventories

Then you can take cash credit.

Otherwise, if you have any other requirement

If you have any personal requirements or business requirement

Which is not related to inventory and receivables, then you can use an overdraft facility.

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