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When managing a business, you'll often encounter "Fund-Based" and "Non-Fund-Based" credit. Cash Credit (CC) and Overdraft (OD) actually put money in your hands, whereas a Bank Guarantee (BG) is a promise the bank makes to a third party on your behalf.
- Cash Credit (CC):
This is the most common form of working capital for businesses (especially manufacturers and traders). It is a revolving credit line specifically designed to fund day-to-day operations.
How it works: The bank sets a limit based on your "Drawing Power" (calculated from your current stock and debtors). You can withdraw and repay as often as you like within that limit.
Collateral: Usually secured by a "hypothecation" of inventory (stock) and receivables (debtors).
Interest: Charged only on the amount you actually use, not the total sanctioned limit.
Best for Businesses with heavy inventory cycles and consistent daily cash needs.
2. Overdraft (OD):
2. Overdraft (OD):
An Overdraft facility allows you to withdraw more money than you have in your current account, up to a pre-approved limit.
How it works: It’s an extension of your existing bank account. If your balance is zero, the bank lets you "overdraw" to pay bills or employees.
Collateral: Can be Secured (against Fixed Deposits, property, or shares) or Unsecured (based on your credit history and relationship with the bank).
Interest: Similar to CC, interest is only paid on the daily overdrawn balance.
Best for Handling sudden, short-term cash flow gaps or emergency expenses.
3. Bank Guarantee (BG):
3. Bank Guarantee (BG):
Unlike CC and OD, a Bank Guarantee is non-fund based. No money changes hands unless things go wrong.
How it works: The bank acts as a "guarantor." If you fail to fulfill a contract or make a payment to a vendor, the bank steps in and pays them on your behalf.
Types:
Financial Guarantee: The bank guarantees you will pay a specific debt.
Performance Guarantee: The bank guarantees you will complete a specific job (common in construction or tenders).
& many mores.
Cost: You don't pay interest; instead, you pay a commission fee (usually a percentage of the guarantee amount per year).
Best for Bidding on government tenders, securing large supply contracts, or importing goods.
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