Cash credit is offered to business establishments. It requires that a security be provided as collateral. This security can be a tangible asset, such as stock, raw materials, or another commodity. The credit limit extended on the cash credit account is normally a percentage of the value of the collateralized security.
A secured overdraft acts more like a traditional loan. As with a cash credit account, money is lent by a financial institution, but a wider range of collateral can be used to secure the credit. For example, you might be allowed to use mutual fund shares, LIC policies, or even debentures. There also is a clean overdraft account, in which no specific collateral is offered, but an overdraft is permitted due to the net worth of the individual. Generally speaking, this is only possible when the borrower has a large account at the financial institution and enjoys a long-standing relationship.
The process of granting short-term credit to an account holder, when his or her balance drops below zero is known as overdraft protection. You might be allowed to use mutual fund shares, LIC policies, or even debentures as collateral.
Overdraft protection comes in several forms and functions differently depending on the banking relationship. It is common for overdraft protection to link two accounts together, allowing funds to automatically be drawn on a reserve account in the event of the primary account being drawn below zero. This function can be helpful in avoiding overdraft fees or having insufficient funds to execute a transaction.