Working Capital Finance: Cash Credit vs Overdraft vs Term Loan

Working capital finance helps a business bridge the gap between paying suppliers and collecting from customers. Banks offer several structures depending on the borrower's cash flow pattern and collateral.

Cash Credit (CC). A revolving facility secured against stock and receivables (hypothecation), where the borrower can draw up to a sanctioned limit and interest is charged only on the utilised amount, not the full limit.

Overdraft (OD). Similar in spirit to cash credit but typically drawn against a current account and sometimes secured by fixed deposits, property, or other collateral rather than inventory.

Term Loan. Used for capital expenditure — machinery, premises, or expansion — repaid over a fixed schedule, and not meant to fund routine working capital gaps.

How banks assess the limit. Lenders typically evaluate projected turnover, the operating cycle (how long cash is tied up in inventory and receivables), and debt-servicing capacity, often summarised through ratios such as the Debt Service Coverage Ratio (DSCR).

Choosing the right facility affects both cost and flexibility, so businesses should match the loan structure to the actual cash flow cycle rather than defaulting to whichever is easiest to sanction.