Cash Credit vs Overdraft vs Term Loan: Why Our Mill Keeps Them Apart

Same drawer, different tools

At our rice mill the working capital sits on a Cash Credit account. The mill and its machinery were paid for in cash, with money the family earned growing peas, so that account has only ever carried working capital. The two kinds of facility are built for different shapes of need, and mixing them makes both harder to run and harder for the bank to read. That is the lens for this whole comparison.

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 really offers under that name. Cash Credit (CC), Overdraft (OD), dropline OD and term loans are all credit facilities, but they are built for different needs, 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 overlap, and how to decide which one fits a given need. As with everything in this series: your own bank's product structure and your own sanction letter control your specific facility. This guide 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 what is drawn, for as long as it is drawn. 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 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. In many banks this behaves operationally like a CC account (revolving, interest on the 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 much physical stock to hypothecate, an OD can be sanctioned on assessed turnover and the banking relationship rather than on stock. It is useful where a stock-based CC does not fit the business model.

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. Day to day it behaves like an OD: draw, repay, draw again within the currently available limit, with interest on the 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 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, sometimes with additional collateral depending on the loan size and the borrower's profile. The business loan EMI calculator shows what a given amount and tenor cost month by month.

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 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 or OD limit rather than replacing it. It is bank-specific, so confirm it 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 deserves its own section: a stock-hypothecated CC account comes with a built-in 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 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 check tied to your operating stock. The limit stays where it is however your inventory moves, which puts more of the discipline on the borrower and on the bank's periodic review. Neither approach is inherently better; they monitor different things, and it pays to know which kind of check applies to your own facility. In a seasonal business like ours, where stock peaks after paddy procurement and then sells down, that monthly self-correction is the whole point.

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 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 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 assumes the need is finite and already has an end date built in, which helps cash-flow planning because you know in advance how the obligation shrinks, instead of depending on a renewal decision each year.

Security and documentation in practice

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

• Stock-hypothecated CC: expects ongoing stock and book-debt statements, purchase and 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.
• 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 hypothecated in the same way.

A fuller 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 or processing, and sale over the following months fits a CC structure well: stock-heavy, cyclical, with drawing power that rises and falls with actual inventory. That is the shape of our own business.
• A retailer with modest but steady stock and 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, such as a design studio or a small IT services firm, may not fit a stock-based CC 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 looks for.

How bank-to-bank naming differences trip people up

A recurring, 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, which offers 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 a savings account broadly is. A "Cash Credit" at one bank and a "Working Capital OD" at another can behave almost identically, while two products both called "Overdraft" at different banks can be structured in completely different ways. The only reliable fix is to read your own sanction letter's actual terms (security, margin, renewal basis, interest structure) rather than reasoning from the product's name or from someone else's experience at a different bank.

Why Our Machinery Never Went Through the CC Account

Our mill's cash credit account finances paddy and seed stock through the milling and selling cycle, and nothing else. The temptation to stretch it further is easy to understand: a revolving limit with headroom in a given month looks like the quickest money available, and nothing new has to be signed. But a machine is paid off over years, while a working-capital line is supposed to come back down every cycle. Put the machine inside the limit and the account stops coming back down. At the next review it reads as exactly what it is, a working-capital line carrying a long-term asset, and the stock cycle it was sanctioned for has less room to work.

Keeping this season's stock financing and a machine the mill will use for years in two separate facilities, each with its own repayment logic, keeps both easy to read: for me, for our accountant and CA, and for the bank. Funding fixed assets through the cash credit is one of the mistakes I watched other business owners make and made a point of avoiding. The rest of that discipline is in my account of running our mill's cash credit.

Three Questions Before You Accept a Facility

Before accepting any facility, ask:

1. What is it financing? A repeating cycle or a one-time purchase.
2. What is it secured against? In writing, not by assumption from the product's name.
3. What happens to the limit or the repayment 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 guide exists to clear up.