Cash Credit vs Overdraft: Availability and Full Cost

Read the facility, then the label

Cash credit commonly finances operating assets through a revolving account whose availability is linked to eligible stock, receivables and agreed margins. An overdraft permits a debit balance under agreed limits and conditions; security and availability can vary by product. Neither label establishes that a borrower qualifies, that a bank must release a particular amount, or that a quoted rate covers every cost.

SBI’s published working-capital FAQ describes finance tailored to the client through different instruments and combinations. That is broad bank-specific context, not a live offer or a rule for every lender. The numerical facilities below are entirely hypothetical. Their eligibility exclusions, margins, holds, rates and fees are stated assumptions, not RBI-prescribed universal terms.

Obtain the sanction and facility agreement, current bank-confirmed availability, expiry/review conditions, interest basis, charges and eligible-asset calculation. Identify any security or cash collateral tied up by the arrangement. A facility requiring restricted deposits can have a very different liquidity effect from an equally sized facility without that requirement.

₹1 crore sanctioned, ₹15 lakh available for another draw

All balances in this example are ₹ lakh. A hypothetical cash-credit facility has a sanction of 100. Book stock is 60; obsolete stock 8 and unpaid stock 12 are separate, nonoverlapping exclusions under its assumed agreement. Eligible paid stock is 40, with a 25% margin, giving a stock component of 30. Book receivables are 50; aged ineligible invoices 10 and separate disputed invoices 5 leave 35 eligible. A 20% margin gives a receivables component of 28.

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The assumed method excludes unpaid stock once; do not deduct the same amount again as a separate creditor adjustment. A real agreement may use another method. Here an 18 draw for a supplier payment exceeds headroom by 3 even though total sanction is 100. The remaining 85 of headline sanction is not additional spendable cash.

Compare an independently approved hypothetical overdraft with a 50 limit,30 outstanding and 2 blocked: additional headroom is 18. It can cover the 18 payment only if all other draw conditions are met and the bank actually permits it. This example does not establish interchangeable security, pricing or availability between the products.

Now assume another 10 of previously eligible receivables becomes ineligible, with no other change. Its receivables component falls from 28 to 20, total drawing power becomes 50 and headroom becomes 7. A change in eligibility removes 8 of availability; a company cannot solve that by leaving the old stock statement unchanged.

Compare cost for an amount both facilities can provide

For a separate like-for-like cost illustration, draw an additional₹12 lakh for 30 days and repay it at the end. Both example facilities have enough initial headroom for 12. Assume cash-credit interest 12% a year and overdraft interest 13%, simple interest on the unchanged incremental amount using 365 days. Assume incremental fees₹2,500 and₹5,000 respectively, paid at the end. These are invented comparison inputs, not current market rates or normal bank charges.

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Cash-credit interest is 12,00,000×12%×30/365. The cost comparison does not make that facility sufficient for the separate 18 payment: it is short 3 in the initial availability case. Include actual benchmark resets, minimum charges, utilisation conditions, documentation, insurance, collateral and applicable tax effects before comparing real offers. This calculation excludes interest on existing borrowing and all unstated costs.

Match the cash need to the repayment event

Schedule the supplier draw and the customer receipt expected to repay it. Test a delayed collection, ineligible invoice or stock write-down against both headroom and cash. Do not count a receivable once as expected cash and again as new borrowing without recording the resulting debt and repayment. A forecast loan receipt is valid only when the facility is genuinely available on that date.

Separate recurring operating investment from equipment and permanent losses. Check permitted end use and duration in the actual contract before using revolving finance for another purpose. An available line may still be unsuitable if the repayment source is uncertain or the borrowing remains permanently at its ceiling.

Keep availability evidence current

• Reconcile stock quantities and valuation, ageing, customer balances and bank-submission exclusions to the books.
• Identify assets already financed, pledged, disputed or otherwise ineligible under the actual agreement.
• Obtain confirmation of outstanding balances, holds, current drawing power and unfulfilled conditions.
• Track required statements, review dates, covenants and security documentation with a responsible owner.

A sanctioned amount, an application acknowledgement or an unverified spreadsheet is not proof that money can be drawn. Use the related working-capital and cash-forecast guides to estimate the need, then compare it with bank-confirmed usable finance and the business’s ability to repay it.