In short
- Cash credit is a revolving limit drawn against stock and receivables.
- An overdraft is a limit on a current account, often against security or a deposit.
- A term loan is a scheduled loan for a defined asset or project — not for the operating cycle.
The wrong instrument is an expensive habit
Businesses often reach for whichever facility is easiest to obtain, then use it for whatever need arises. Using a revolving limit to fund a long-term asset means paying interest indefinitely on something that should have been repaid on a schedule. Matching the instrument to the need is most of the battle.
Cash credit
A cash credit is a revolving limit drawn against a borrowing base of stock and acceptable receivables, and reviewed periodically. The sanctioned limit is a ceiling; what you can actually draw — the drawing power — is set by the current value of that borrowing base, so it moves through the year. Renewal discipline matters: a lapsed review can suspend drawing.
Overdraft
An overdraft is a limit attached to a current account, allowing the balance to go negative up to an approved amount. Interest is charged on the amount and the duration drawn, so clearing it regularly costs less. Overdrafts are often smaller and more likely to be backed by security or a lien on a deposit.
Term loan
A term loan is scheduled and purpose-bound: it funds a defined asset, expansion or project, and is repaid over a fixed tenure matched to the life of what it buys. It is the right instrument when the money buys something that will earn over years, and the wrong one for a working-capital gap.
How to choose
- Is the need recurring and tied to the operating cycle? A limit — cash credit or overdraft — fits.
- Is it a one-time asset or project with a life of its own? A term loan fits.
- What can the cash flow service without strain in a weak month, not just an average one?
- What will the lender accept as security, and what does that tie up?
Watch the renewal
Limits are reviewed and renewed, and a lapsed renewal can freeze the working capital a business depends on precisely when it is needed most. Treat renewal dates as fixed obligations and prepare the submissions well ahead.
Questions this raises
Can I use a cash credit to buy machinery?
- No. Machinery is a long-term asset and belongs to term-loan territory; funding it on a revolving limit means paying for it indefinitely.
Why is my drawing power below my sanctioned limit?
- Because drawing power is set by current stock and acceptable debtors, not by the sanctioned figure. It moves as the borrowing base moves.
Read the full guidance on cash credit.