Businesses need working capital to meet their day-to-day operations. The working capital of a business can be met through multiple products. We analyse two fund based products – Cash Credit (CC) & Overdraft (OD) to help you better plan your working capital requirement on the based on below points:
- Amount:
OD is product more suited to working capital needs below Rs. 3 Crores. For working capital needs above Rs. 3 Crores CC is a more suited product.
- Margin :
In CC product as part of overall working capital, the borrower brings his share of margin. The margin is in the range of 20-25%. Eg. If the total working capital requirement is assessed at Rs. 100 than the customer brings Rs. Rs. 20-25 as his share or margin. No such margin has to be brought by the borrower in OD product.
- Modus Operandi:
Although CC limits are sanctioned, it is reviewed monthly basis on submission of stock and book debts statements and calculation of drawing power on the based. The customer has to always ensure the amount of utilisation is within the drawing power as computed on monthly basis.
In case of OD no such details are to be submitted on periodically basis hence the utilisation is fixed so the customer plans accordingly.
- Interest & Other Costs:
In case of CC the interest costs are on lower side as compared to overdraft product.
In CC product there is hypothecation of Current Assets financed by bank and mortgage of additional collateral security. Also the customer has to ensure bank related compliances i.e submission of monthly stock and book debt statements, stock audits, etc. This result in additional cost over and above the interest costs.
No such compliances are required in OD product thereby leading to NIL additional cost.
