by Cash Credit
Cash Credit is a financial tool used by businesses to borrow short-term funds from a lender. It is a type of loan that provides businesses with quick access to cash to meet their short-term financial needs, such as paying suppliers, covering operating expenses, or managing unexpected costs.
Cash credit is a revolving line of credit, meaning that the business can draw from the credit line as needed and repay the funds as they are used. The business is only charged interest on the amount that is actually borrowed, and the interest rate is typically based on the prevailing market rates.
Cash credit is often used by businesses that have a fluctuating cash flow, as it provides them with the flexibility to borrow funds as needed and repay them when their cash flow improves.
To obtain a cash credit, a business must typically provide collateral and demonstrate its ability to repay the loan. The lender will also consider the business’s credit history, financial statements, and other financial metrics to assess its creditworthiness.
There are several types of cash credit that businesses can access, including:
- Revolving line of credit: This type of cash credit allows the business to borrow funds as needed and repay them as they are used. The business has a set credit limit, and can access the funds at any time.
- Term loan: A term loan is a type of cash credit that is provided for a specific period of time, typically 1-5 years. The business must repay the loan in regular instalments over the term of the loan.
- Overdraft: An overdraft is a type of cash credit that allows a business to access funds up to a certain limit when its checking account balance is negative. The business is charged interest on the amount that is borrowed.
- Letter of Credit: A letter of credit is a type of cash credit that is provided to a business to guarantee payment for goods or services that it has purchased. The business can draw on the letter of credit if the supplier does not receive payment.
- Invoice financing: Invoice financing is a type of cash credit that allows a business to access funds based on its outstanding invoices. The business can receive a portion of the value of its invoices up front, and then repay the funds when its customers pay the invoices.
Each type of cash credit has its own advantages and disadvantages, and the best type for a particular business will depend on its specific needs and financial situation. In general, businesses should consider their cash flow needs, their ability to repay the loan, and the cost of the credit when choosing a type of cash credit.
The laws and regulations governing cash credit can vary significantly from country to country. Some of the factors that can affect the laws surrounding cash credit include the country’s legal system, the stage of economic development, and the level of competition in the financial sector.
Here are a few examples of cash credit laws in different countries:
- United States: In the United States, cash credit is regulated by both federal and state laws. Federal laws, such as the Truth in Lending Act, set standards for the disclosure of credit terms and fees, while state laws may regulate the interest rates that can be charged on cash credit.
- Europe: In Europe, cash credit is governed by a range of EU and national laws. The EU Consumer Credit Directive sets minimum standards for the disclosure of credit terms and fees, while national laws may impose additional requirements, such as caps on interest rates.
- Australia: In Australia, cash credit is regulated by the Australian Securities and Investments Commission (ASIC). ASIC oversees the disclosure of credit terms and fees, and ensures that lenders comply with responsible lending obligations.
- India: In India, cash credit is regulated by the Reserve Bank of India (RBI). The RBI sets standards for the disclosure of credit terms and fees, and supervises the operations of banks and other lenders.
- China: In China, cash credit is regulated by the People’s Bank of China (PBOC). The PBOC sets standards for the disclosure of credit terms and fees, and supervises the operations of banks and other lenders.
Overdraft
An overdraft is a type of loan that allows a person or a business to access funds in their checking account when their balance is negative. An overdraft provides the account holder with a pre-agreed line of credit that they can use to cover short-term cash shortfalls.
In most cases, overdrafts are a short-term solution for account holders who need to access funds quickly. The account holder is typically charged a fee for each overdraft transaction and a higher interest rate on the amount that is borrowed.
There are two main types of overdrafts: an authorized overdraft and an unauthorized overdraft. An authorized overdraft is a pre-agreed line of credit that is available to the account holder, while an unauthorized overdraft occurs when the account holder accesses funds that they have not been approved to use. Unauthorized overdrafts can result in additional fees and charges, as well as damage to the account holder’s credit score.
Overdrafts can be a useful tool for people and businesses who need access to funds quickly, but they should be used with caution. Overdrafts can be expensive, and account holders should be mindful of the fees and interest charges that they will be required to pay. It is also important to ensure that the overdraft is repaid as soon as possible, as ongoing overdraft use can quickly become unsustainable.
Overdraft types
An overdraft is a type of loan that allows you to spend more money than you have in your bank account. There are several types of overdrafts, including:
- Overdraft Protection: This type of overdraft allows you to overdraw your account up to a predetermined limit. If you exceed this limit, your transactions will be declined.
- Opt-in Overdraft: This type of overdraft allows you to overdraw your account, but you must first opt-in to the service. Opt-in overdrafts typically come with fees for each overdraft transaction.
- Courtesy Overdraft: This type of overdraft allows you to overdraw your account, but the bank may choose to cover the overdraft or not. If the bank covers the overdraft, it will typically charge a fee.
- Continuous Overdraft: This type of overdraft is similar to an open line of credit. You can overdraw your account as needed, but you will be charged interest on the amount you have overdrawn.
- Emergency Overdraft: This type of overdraft is meant for unexpected events, such as a medical emergency or car repair. The bank may approve a one-time overdraft for a set amount, but it will typically charge a fee for this service.
The Laws and Regulations surrounding overdrafts vary by country.
United States: In the US, overdraft laws are governed by the Federal Reserve. Banks are required to disclose their overdraft policies to customers, including the fees associated with overdrafts. Banks are also required to obtain the customer’s consent before enrolling them in an overdraft protection program.
United Kingdom: In the UK, overdrafts are regulated by the Financial Conduct Authority (FCA). Banks are required to be transparent about their overdraft fees and interest rates, and customers must be given the option to opt-in to overdraft protection. The FCA also limits the amount that can be charged for an unarranged overdraft.
Australia: In Australia, overdrafts are regulated by the Australian Securities and Investments Commission (ASIC). Banks are required to provide customers with information about their overdraft fees and interest rates, and customers must opt-in to overdraft protection. ASIC also sets limits on the amount that can be charged for overdrafts.
Canada: In Canada, overdraft laws are governed by the Office of the Superintendent of Financial Institutions (OSFI). Banks are required to disclose their overdraft fees and interest rates to customers, and customers must opt-in to overdraft protection. OSFI also sets limits on the amount that can be charged for overdrafts.
European Union: In the European Union, overdrafts are regulated by the European Banking Authority (EBA). The EBA requires banks to be transparent about their overdraft fees and interest rates, and customers must opt-in to overdraft protection. The EBA also sets limits on the amount that can be charged for overdrafts.
In India, overdrafts are regulated by the Reserve Bank of India (RBI). The RBI requires banks to clearly disclose the terms and conditions of their overdraft facilities, including the interest rates and fees associated with overdrafts.
Customers must provide a collateral, such as a fixed deposit, to secure an overdraft facility. The RBI also sets limits on the amount of overdraft that a customer can avail based on the collateral provided.
Key Differences Between Cash Credit and Overdraft
|
Cash Credit |
Overdraft |
| A type of loan in which a borrower is given a certain amount of credit to use as needed | A type of loan that allows a borrower to withdraw more money from their account than they have available, up to a pre-approved limit |
| Borrower can use the loan only up to the approved limit | Borrower can withdraw more money than the approved limit, but is subject to charges for exceeding the limit |
| Repayment is done in installments | Repayment is done in full, typically on a monthly basis |
| Generally, has a fixed rate of interest | Generally, has a floating rate of interest |
Important Differences Between Cash Credit and Overdraft
Purpose: Cash Credit is a loan in which a borrower is given a certain amount of credit to use as needed, while Overdraft is a loan that allows a borrower to withdraw more money from their account than they have available, up to a pre-approved limit.
Loan Amount: Cash Credit has a set loan amount, while Overdraft allows a borrower to withdraw more money than the approved limit, but is subject to charges for exceeding the limit.
Repayment: Cash Credit has a set repayment schedule in installments, while Overdraft requires full repayment each month.
Interest Rate: Cash Credit generally has a fixed rate of interest, while Overdraft generally has a floating rate of interest.
Usage: Cash Credit can only be used up to the approved limit, while Overdraft allows a borrower to withdraw more money than the approved limit.
