Working Capital Loan vs Cash Credit vs Overdraft - Which Fits Your Cash Cycle
Working capital loan, cash credit, and business overdraft are often used interchangeably in casual conversation and even at some bank branches. They are not the same product. This guide is written by someone who has designed all three from the lender side and can walk you through which fits which kind of business, and how the pricing math differs across all three.
What each product actually is
Working capital term loan. A fixed-amount loan disbursed as a lump sum with a defined repayment schedule (typically 12 to 36 months). You receive the full loan amount in your account on Day 1 and pay EMIs until closure. Interest accrues on the full outstanding principal.
Cash credit (CC). A revolving credit facility linked to your current account. The bank sanctions a limit (say Rs. 20 lakh). You can draw any amount up to that limit as needed, repay any amount at any time, and re-draw as required. Interest accrues only on the daily outstanding balance actually drawn, not on the full sanctioned limit.
Business overdraft (OD). Structurally similar to cash credit but usually with a smaller ticket size, simpler underwriting, and often without collateral. Also revolving. Interest accrues on drawn amounts only.
The distinction between CC and OD has blurred at many banks. Some treat OD as “CC for smaller businesses”. Others treat them as materially different products. Ask specifically for the product features at your bank rather than assuming based on the name.
How pricing actually works across the three
Working capital term loans are priced at fixed or floating interest rates, typically 10.5 to 15 percent per annum. The EMI is calculated on the full sanctioned amount from Day 1.
Cash credit and overdraft are priced slightly higher on paper (typically 11 to 16 percent), but interest is charged only on the average daily drawn balance. If your business genuinely draws and repays actively across the month, effective interest cost is often lower than a term loan of the same size.
The rough decision rule: if you would draw and repay the credit line more than once a month, CC or OD is cheaper. If you would draw once and repay in installments, a term loan is cheaper.
Take a Rs. 15 lakh working capital requirement. Under a term loan at 12.5 percent for 24 months, total interest paid is roughly Rs. 2 lakh across the tenure. Under a cash credit at 13.5 percent with average utilisation of 55 percent (typical for retail businesses with seasonal peaks), interest paid across 24 months is roughly Rs. 2.23 lakh - very slightly higher despite the lower rate math. But if utilisation is 40 percent because your cash cycle is short, the CC costs roughly Rs. 1.62 lakh. If utilisation is 75 percent because your working capital is chronically tight, CC costs roughly Rs. 3.04 lakh. Utilisation pattern, not headline rate, decides the winner.
Drawing Power - the calculation that determines your actual limit
Cash credit and overdraft limits are not fixed at the sanctioned number. They are recalculated periodically based on Drawing Power, which is the amount the bank believes your current stock and receivables can support.
Drawing Power = (Stock at market value - Creditor payments due) + (Book debts up to 90 days old x 0.75) - (Prior charges)
The bank asks you to submit monthly or quarterly Stock Statements showing current inventory value, aged receivables, and creditor obligations. Based on these, the drawing power is refreshed and your effective limit adjusts.
If your stock and receivables decline (post-festival lull, slow season, customer payment delays), drawing power falls below the sanctioned limit. You can no longer draw the full sanctioned amount even though it appears on paper.
For seasonal businesses (fashion retail, agri-inputs, wedding services), managing drawing power documentation actively is more important than negotiating the headline rate. A well-documented stock statement in a peak month unlocks the full limit; a sloppy statement in a lean month restricts it below what you actually need.
When a working capital term loan wins
Three scenarios where a term loan is the right choice.
Large one-time working capital need. New product line launch, bulk raw material purchase against a signed contract, expansion into new geography. You need the full amount upfront and will repay from operating cash flow over a defined period.
Predictable repayment capacity. Your business generates steady monthly cash flow (subscription revenue, retainer contracts, government supply orders). A fixed EMI structure is easier to manage than a revolving limit with variable drawing power.
Newer businesses without complex inventory. For service businesses without significant physical stock, drawing power calculations are impractical. Term loans are the simpler fit.
When cash credit or overdraft wins
Three scenarios where a revolving facility is the right choice.
Trading businesses with monthly stock cycles. Retailers, wholesalers, and distributors typically buy inventory, sell it, collect receivables, and buy again on a 30 to 45 day cycle. A revolving limit matches this cadence.
Businesses with lumpy receivables. Manufacturers supplying to large corporates or government departments face payment delays of 60 to 120 days. A CC lets you fund the gap without paying interest on days when your outstanding is low.
Businesses that already have a strong current account relationship. CC and OD are almost always cheaper to obtain from your existing bank than from a new lender, because the bank uses your existing transaction history for underwriting instead of full documentation.
Use the business loan EMI calculator to model both a term loan structure and estimated CC interest based on your utilisation pattern before deciding. The numbers often surprise borrowers who assumed CC was strictly cheaper.
Collateral and processing fees compared
Working capital term loans are often unsecured up to Rs. 20 to 25 lakh through NBFCs (Bajaj, Tata Capital, Poonawalla) and up to Rs. 10 to 15 lakh at banks. Higher amounts typically require collateral (property, fixed deposits, gold).
Cash credit above Rs. 25 to 30 lakh at banks almost always requires collateral in the form of stock hypothecation (the stock itself is pledged), book debt hypothecation (receivables are pledged), or property collateral. CGTMSE can provide guarantee cover for eligible collateral-free facilities up to Rs. 10 crore, subject to lender type.
Business overdrafts under Rs. 15 lakh are often available unsecured against a personal guarantee, especially for existing bank customers. Above that, collateral requirements kick in.
Processing fees range from 0.5 to 2 percent for term loans, 0.25 to 1 percent for CC and OD renewal (charged annually, not just at inception). The recurring annual fee on revolving facilities is often overlooked when comparing costs.
On a Rs. 30 lakh cash credit facility, the annual renewal fee at 0.75 percent is Rs. 22,500 plus GST, charged every year the facility stays open. Across 5 years of running the facility, that is Rs. 1.34 lakh in recurring fees alone before you count interest on drawn amounts. Term loans do not have this ongoing charge. When comparing 5-year total cost, add expected renewal fees to the CC estimate. In some cases, taking a 3-year term loan and refinancing with another 3-year term loan works out cheaper than running a 6-year CC even if the interest math looks worse in isolation.
The disbursal timeline reality
Working capital term loans from NBFCs disburse in 3 to 7 working days for straightforward files, 10 to 15 days for cases requiring additional verification. Bank term loans take 15 to 30 days.
Cash credit and overdraft take longer to originate (15 to 45 days) because collateral valuation and stock statement documentation must be completed. However, once the facility is running, drawing and repaying are same-day operations.
For urgent cash flow gaps, a term loan from an NBFC beats a CC application on speed. For chronic working capital cycles, the one-time delay to set up a CC is worth it because subsequent access is instant. Our detailed business loan disbursal time guide covers the practical timelines across lender categories.
What to do before applying
Before deciding between term loan, CC, and OD, calculate your actual utilisation pattern. Look at your last 12 months of current account transactions. Identify how many days per month you would have drawn a working capital line and how many days you would have repaid it. If the pattern is active (drawing and repaying frequently), CC or OD is the honest fit. If the pattern is static (one drawdown, gradual repayment), a term loan is the honest fit.
Use the Working Capital Calculator to estimate the requirement created by your operating cycle, then use the OD and CC Interest Calculator to compare that running limit with a term loan at your expected utilisation.
If the gap is tied to specific accepted receivables, use the Invoice Discounting Calculator to compare the annualised discounting cost with carrying those invoices on cash credit.
Do not accept a product because it is what the bank happens to be pushing. The wrong structure for your business type is more expensive in the long run than the wrong bank at the right structure.
This guide was written by practitioners who have worked on MSME credit policy, loan product design, and underwriting at Indian banks and NBFCs. We write from the inside of the system - not from a generic content brief. Data and lender information is verified quarterly. If you spot an error or outdated figure, write to us.
Use our free EMI calculator to compare repayment options before you walk into a bank.