Understanding Cash Credit, Overdraft (OD) and Dropline OD

Understanding Fund-Based Working Capital Instruments

Many business owners seek assistance from banks to fulfill their working capital funding needs. However, they often encounter challenges in choosing the right working capital instrument that fits their personal and business goals. This article aims to clear up this confusion and shed light on the most common fund-based working capital instruments.

Types of Fund-Based Working Capital

Here are the three most prevalent types of working capital funding instruments that businesses can obtain from banks:

1. Cash Credit (CC)
In a Cash Credit facility, the bank approves a specific credit limit, allowing the borrower to draw any amount within that limit. Interest is charged only on the amount used, calculated on a daily balance basis, rather than on the total approved limit. However, the maximum amount that can be withdrawn in a given month is determined by the lower of the following:

a) The actual approved limit
b) The amount calculated based on the borrower's eligibility in the Drawing Power (DP) statement

2. Bank Overdraft (OD)
A Bank Overdraft is usually offered to smaller borrowers and operates on principles similar to Cash Credit. However, a significant difference is that the requirement for a DP statement does not apply. Borrowers are not required to submit stock statement-related information to the bank monthly. Like Cash Credit, interest is charged only on the amount utilized, calculated daily.

3. Dropline Overdraft (DOD)
Dropline Overdraft (DOD) is a unique facility introduced by some banks to meet the working capital needs of specific borrowers. Some business owners aim to become debt-free but understand that it must be a gradual and disciplined process. The DOD facility supports this transition by functioning like CC/OD, allowing the borrower to access funds as needed while paying interest only on the amount used.