Cash Credit vs Overdraft vs Term Loan: Which Facility Fits an Indian Business?

Same drawer, different tools

Ask five business owners to define "overdraft" and you may get five slightly different answers, and all five could be describing something their own bank genuinely offers under that name. Cash Credit (CC), Overdraft (OD), dropline OD, and term loans are all credit facilities, but they are built for different shapes of need, secured in different ways, and priced on different logic. Confusing one for another is not just a technicality — it is how businesses end up financing a factory shed out of a working-capital account that was never meant to carry it for years.

This guide lays out what each facility typically looks like in India, where they genuinely overlap, and how to think about which one actually fits a given need. As with everything in this cluster: your own bank's product structure and your own sanction letter control your specific facility — this article explains common patterns, not a universal rulebook.

Cash Credit (CC), briefly

Covered in full in Cash Credit Account in India, so only the essentials here: CC is a revolving working-capital limit, typically secured by hypothecation of stock and receivables, with drawing power recalculated from a periodic stock statement and interest charged only on the daily outstanding balance. It is assessed against your working-capital cycle — turnover, inventory-holding period, receivable and payable days — rather than against a single transaction.

Overdraft (OD), and why it is not one single thing

"Overdraft" in Indian banking covers more ground than CC does, because the same word is used for genuinely different structures:

• OD against fixed deposit (FD): the bank lends against your own FD as security, usually up to a high percentage of the FD value, at a rate linked to the FD rate plus a spread. This is close to risk-free for the bank and typically fast to sanction, but it is capped by how much you have parked in FDs — it does not grow with your business.
• OD against property: secured by a mortgage on immovable property, sanctioned against an assessed value of the property and, for a business borrower, often also against assessed cash flow or turnover. This behaves operationally like a CC account in many banks — revolving, interest on daily balance — but the underlying security and assessment basis differ.
• OD against assessed business cash flow: in some banks, especially for services or trading businesses without heavy physical stock to hypothecate, an OD can be sanctioned based on assessed turnover and banking relationship rather than on stock — useful where a CC-style stock-based facility does not fit the business model well.

Because "overdraft" spans all of these, do not assume a specific OD product at your bank is secured, unsecured, stock-based, or property-based without checking your own sanction letter.

Dropline overdraft

A dropline OD (also called reducing OD) is structurally a middle ground: it behaves like an OD day to day — draw, repay, draw again within the currently available limit, interest on daily balance — but the sanctioned limit itself is programmed to step down on a fixed schedule over the facility's tenor, rather than staying flat and being reviewed for renewal each year. This suits a need that is real now but genuinely expected to shrink — for example, financing an inventory build-up tied to a specific, time-bound contract, rather than an indefinitely repeating working-capital cycle.

Term loan

A term loan is a one-time disbursed amount, repaid over a fixed tenor through scheduled instalments (EMI or a structured repayment plan), typically used to finance a long-life asset: machinery, factory construction, vehicles, or a one-time expansion. Interest runs on the outstanding loan balance per the repayment schedule, not on a fluctuating daily draw. Security is usually the asset financed itself, plus sometimes additional collateral depending on the loan size and the borrower's profile.

Working-capital demand loan

Some banks also offer a working-capital demand loan (WCDL) — a portion of the sanctioned working-capital limit carved out as a short-tenor term loan (commonly a matter of weeks to a few months) rather than a fully revolving balance, sometimes used to fund a specific, identifiable stock build-up within an overall working-capital sanction. Where this exists, it usually sits alongside a CC/OD limit rather than replacing it — again, bank-specific, and worth confirming directly with your relationship manager if your sanction letter mentions it.

Drawing power and stock-based control: where CC pulls ahead of most OD variants

One practical difference worth calling out on its own: a stock-hypothecated CC account comes with an inbuilt discipline mechanism — drawing power — that most OD variants do not have in the same form. Because DP is recalculated from your actual stock and receivables each cycle, the facility self-corrects if your inventory genuinely shrinks: you simply cannot draw against stock you no longer hold, whatever the sanctioned limit says. An FD-backed or property-backed OD has no equivalent built-in check tied to your operating stock — the limit stays where it is regardless of how your inventory moves, which puts more of the discipline burden on the borrower and the bank's periodic review rather than on the facility's own monthly mechanics. Neither approach is inherently better; they simply monitor different things, and it is worth knowing which kind of check applies to your own facility.

Sanction period, renewal, and what happens at the end of the tenor

CC and most OD variants are sanctioned for a period — commonly a year — and then reviewed for renewal, not repaid to zero and closed out. A dropline OD instead runs to the end of its own tenor as the limit steps down, similar in spirit to a term loan reaching maturity, though it is still operated as a running account throughout. A term loan has a fixed final maturity date by design, after which the loan is fully repaid and the facility simply ends.

This matters for planning: a revolving CC or OD assumes the underlying working-capital need will still exist next year and beyond, and the annual renewal is where the bank re-checks that assumption against your current financials and account conduct (see Cash Credit Renewal, Limit Enhancement and NPA Risk). A dropline OD or term loan, by contrast, assumes the need is finite and already has an end date built into its structure — useful for planning cash flow precisely because you know in advance how the obligation shrinks over time, rather than depending on a renewal decision each year.

Security and documentation in practice

The documentation a bank asks for tends to track what is securing the facility, more than what the facility is called:

• Stock-hypothecated CC: expects ongoing stock and book-debt statements, purchase/sales records, and periodic stock audit access — because the security itself (stock) changes daily and needs monitoring.
• FD-backed OD: documentation is comparatively light — the FD receipt and a lien marking are often most of what is needed, since the security value is fixed and already with the bank.
• Property-backed OD: needs title documents, a legal search report, and a valuation report up front, similar to a term loan against property, even though the facility then operates like a revolving account day to day.
• Cash-flow-assessed OD: leans more heavily on bank statements, GST returns, and audited or provisional financials, since there is no hard physical or financial asset being hypothecated in the same way.

A fuller, cluster-wide document checklist — covering new applications, renewal, enhancement, and bank takeover — is in Cash Credit Loan Documents in India.

Comparing them side by side

Matching the facility to the need: quick examples

• A rice mill or seed-trading business financing seasonal paddy or seed procurement, milling/processing, and sale over the following months fits a CC structure well — stock-heavy, cyclical, with drawing power that naturally rises and falls with actual inventory.
• A retailer with modest but genuine stock and steady footfall may be better served by a smaller CC or an OD sized to a shorter cash gap, rather than a large limit that sits mostly undrawn.
• A contractor billing municipal or corporate clients on 60-90 day terms, with material and labour paid upfront, often needs a CC or OD sized to the billing cycle — plus, separately, a term loan if machinery or vehicles are involved.
• A service business with light or no physical stock — a design studio, a small IT services firm — may not fit a stock-based CC well at all, and is a more natural candidate for an assessed-cash-flow OD or, for a specific growth need, a term loan.

In every case, the facility should be sized and structured to the timing gap or the asset it is meant to cover — not chosen because it is the product a relationship manager happens to be promoting that quarter.

Common misuse worth naming directly

The most frequent, avoidable misuse across CC, OD, and dropline OD alike is using a revolving working-capital limit to fund something that is not working capital: a new delivery vehicle, a factory shed, a second unit's initial setup, or — worst of all — a shortfall caused by underlying losses rather than timing. Doing this does not show up as fraud or an obvious red flag on day one. It shows up months later as an account that never comes back down to a healthy utilisation level between cycles, which is exactly the pattern a bank's annual review is designed to catch — see Cash Credit Renewal, Limit Enhancement and NPA Risk for what that review actually looks for.

How bank-to-bank naming differences actually trip people up

A recurring, entirely avoidable confusion: a business owner hears that "OD is unsecured and CC is secured" from a friend's experience at one bank, then assumes that rule holds everywhere, including at their own bank offering a property-backed OD that is very much secured. Or the reverse — someone assumes a CC account must always require heavy documentation and physical stock audits, then is surprised when a smaller, cash-flow-assessed OD-style facility at their own bank asks for comparatively little. Bank product catalogues are not standardised across the industry the way, say, a savings account broadly is — a "Cash Credit" at one bank and a "Working Capital OD" at another can behave almost identically in practice, while two products both called "Overdraft" at different banks can be structured in completely different ways. The only reliable fix is reading your own sanction letter's actual terms — security, margin, renewal basis, and interest structure — rather than reasoning from the product's name or from someone else's experience at a different bank.

From my rice-mill experience

When we needed to add processing equipment at Sudha Rice & Seeds, the instinct to just draw it out of the CC account — since the limit had headroom that month — was there, and it was the wrong instinct. We financed equipment separately, on its own repayment schedule, and kept the CC account doing what it was sanctioned to do: financing paddy and seed stock through the milling and selling cycle. In hindsight, the discipline of keeping "this quarter's stock financing" and "a machine we'll use for the next ten years" in two completely separate facilities, with two separate repayment logics, made both easier to manage — and made the CC account's conduct look exactly like what it was: a working-capital line being used for working capital, nothing more.

What this means in practice

Before accepting a facility, ask three questions: what is this actually financing — a repeating cycle or a one-time purchase; what is it secured against, in writing, not by assumption from the product's name; and what happens to the limit or the repayment schedule over time — does it stay flat and get reviewed annually (CC/OD), step down on a schedule (dropline OD), or run to a fixed maturity (term loan). Getting these three answers from your own sanction letter, rather than from the product's common name, avoids most of the confusion this article exists to clear up.

Sources and methodology

This comparison is based on how Cash Credit, overdraft, and term loan facilities are commonly structured by Indian scheduled commercial banks, read against the Reserve Bank of India's public master circulars on lending (linked below), and on first-hand experience choosing between these facilities for a real working-capital-funded business. Because product names and exact structures vary by bank, this article deliberately avoids stating a single universal definition for "overdraft" and repeatedly points back to the sanction letter as the actual source of truth. Last verified against the sources below on 1 August 2026.

Educational disclaimer

This article explains common facility structures in Indian business banking for educational purposes. It does not describe any specific bank's product, and it is not personalised lending or financial advice. Confirm the actual structure, security, and terms of any facility with your bank before relying on them.