Cash Credit vs Overdraft vs Bill Discounting: Working Capital Finance for a Pvt Ltd

A cash credit (CC) is a revolving limit against stock and debtors; an overdraft (OD) is usually a revolving limit against a fixed asset, FD, or property; bill discounting converts confirmed receivables into immediate cash. A hypothecated CC and a secured OD create a charge on your company's assets, which Section 77 of the Companies Act 2013 requires your Pvt Ltd to register with the Registrar of Companies within 30 days of its creation. Bill discounting usually does not, unless the bank also takes a charge over your receivables or other assets.

Legal basis: Companies Act 2013, Section 2(16) (meaning of "charge"); Section 77 (Duty to register charges); Section 78 (Application for registration by the charge-holder); Section 82 (Satisfaction of charge); Section 86 (Penalty for contravention).

What is the difference between a cash credit and an overdraft?

Both are revolving working capital limits: you draw and repay within a sanctioned limit, paying interest only on the outstanding daily balance. The difference is the underlying security and how the limit is calculated. The structures below describe common bank practice, not law; every bank sets its own terms in the sanction letter.

Cash credit — how it is structured

A CC limit is sized around your current assets: inventory and trade receivables. The bank sanctions a limit (say ₹2 crore) and sets a Drawing Power (DP) formula. In practice, banks commonly keep a margin on stock and on book debts (for example, lending against 75% of eligible stock and a similar share of debtors below a set age), but the percentages and age cut-offs are a matter of each bank's credit policy.

Security is typically a floating hypothecation charge on all present and future current assets. Banks generally inspect hypothecated stock periodically and can reduce your drawing power if stock is overstated or already pledged elsewhere.

Overdraft — how it is structured

An OD is a revolving limit, usually against a stable asset. Common variants in bank practice: OD against property, OD against a fixed deposit (the bank lends a share of the FD value, usually at a rate linked to the FD rate), and OD against life insurance policies. Loan-to-value ratios and spreads vary by bank. A "clean" OD with no security taken is also possible for some borrowers.

Bill discounting — how it is structured

Bill discounting is not a revolving line: each transaction is a purchase of, or advance against, a specific bill or invoice. You submit the bill to the bank, and the bank pays you its value less a discount (and sometimes after keeping a margin). Cost is the discount deducted upfront. As an illustration, at 9% a year on a 60-day tenor, a ₹50 lakh bill carries about ₹74,000 in discount (₹50,00,000 × 9% × 60/365 = ₹73,973).

Whether a discounting arrangement creates a registrable charge depends on how it is documented. Section 2(16) defines a charge as an interest or lien created on the company's property or assets "as security". On that wording, an outright purchase of a bill without recourse is generally a sale rather than security; discounting with recourse, or with a lien over the bills, should be checked against Section 2(16). If the bank's documents also hypothecate your receivables to secure the facility, that part is a charge and needs registration.

What does a ₹2 crore working capital limit actually cost?

Interest on a CC or OD is charged on the daily outstanding balance, not the sanctioned limit. So a ₹2 crore limit that is drawn to ₹1.2 crore on average costs interest on ₹1.2 crore.

Other costs you should expect, as a matter of bank practice: a processing fee on sanction, stock inspection or audit charges, a renewal fee at the annual review, and the government fee for registering the charge with the Registrar.

What does Section 77 require when a Pvt Ltd takes a CC or OD?

Section 2(16) of the Companies Act 2013 defines a "charge" as an interest or lien created on the property or assets of a company, or any of its undertakings, as security, and it includes a mortgage. When a bank takes hypothecation of your stock and debtors, or a mortgage over property, it is taking a charge.

Section 77(1) requires the company to register the particulars of the charge, signed by the company and the charge-holder, together with the instrument creating it, with the Registrar within 30 days of its creation, in the prescribed form and on payment of the prescribed fees.

If that window is missed, the proviso to Section 77(1) allows the Registrar, on the company's application, to permit registration within 60 days of creation on payment of additional fees. Beyond that, the Registrar may, on application, allow registration within a further 60 days on payment of ad valorem fees.

Section 77(3): no charge created by a company is taken into account by the liquidator (appointed under the Companies Act or the Insolvency and Bankruptcy Code) or by any other creditor unless it is duly registered and a certificate of registration has been given. Section 77(4) adds that this does not affect the company's obligation to repay the money secured. In practice, this is why your bank will insist the filing is made on time.

Any modification of a registered charge, for example an enhancement of the CC limit secured by the same hypothecation, is also covered by Section 77 through Section 79.

When the loan is repaid in full, Section 82(1) requires the company to intimate the Registrar of the payment or satisfaction within 30 days. The proviso allows the Registrar to accept the intimation up to 300 days after satisfaction, on payment of additional fees.

Penalty — Section 86(1) (as substituted by the Companies (Amendment) Act 2020, w.e.f. 21-12-2020), for default in complying with any provision of Chapter VI:

• Company: ₹5,00,000


• Every officer in default: ₹50,000

MPBF and the Drawing Power calculation

Many banks still size working capital limits using the Maximum Permissible Bank Finance (MPBF) approach, often called Method II. This is a bank appraisal method, not a statutory rule, and each bank may use its own variant.

MPBF (Method II) = (0.75 × Current Assets) – Other Current Liabilities

Example: Current Assets = ₹4 crore, Other Current Liabilities (excluding bank borrowings) = ₹1 crore → MPBF = (0.75 × ₹4 crore) – ₹1 crore = ₹2 crore.

Banks generally ask for this analysis in a Credit Monitoring Arrangement (CMA) data package: historical and projected financial statements in the bank's format.

Frequently asked questions

Q1. Does every working capital facility require a charge filing?

No. Only a facility where the company creates an interest or lien on its property or assets as security is a charge under Section 2(16). A clean OD with no security, or an outright sale of a bill to the bank, may not involve a charge. A hypothecated CC, and an OD backed by a mortgage of property, a lien over a fixed deposit or hypothecation, involve a charge that must be registered under Section 77(1). Read the sanction letter and the security documents, not just the facility name.

Source: Companies Act 2013, ss. 2(16) and 77(1).

Q2. The bank said it will file the charge — do we need to do anything?

Section 78 allows the charge-holder to apply to the Registrar for registration if the company fails to register within 30 days, and lets the charge-holder recover the fees from the company. The duty under Section 77 remains the company's, and the penalty under Section 86 applies to the company and its officers in default. The intimation of satisfaction on repayment under Section 82(1) is also the company's duty.

Q3. What financial documents does a bank typically ask for when sanctioning a CC?

In practice: the last three years of audited financials, provisional financials for the current year, monthly stock statements, debtors and creditors ageing, GST returns, income tax returns, details of existing borrowings, collateral documents, and the CMA data package.

Q4. Can an early-stage startup get a CC limit without an audited track record?

Most banks prefer two to three years of audited financials before sanctioning a CC limit. Alternatives founders commonly explore include an OD against a promoter's FD or property, or venture debt for funded startups. Eligibility and terms are each lender's decision.

This article explains the general position and is not a legal opinion on any specific facility. Check your sanction letter and security documents with your adviser before filing.

Sources

• Companies Act 2013 (as amended), Sections 2(16), 77, 78, 79, 82 and 86, India Code: https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf. Section 77 provisos substituted by Act 22 of 2019, s. 11 (w.e.f. 2-11-2018); Section 86(1) substituted by Act 29 of 2020, s. 16 (w.e.f. 21-12-2020). Checked 22 Oct 2026.

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See Also

• Why Indian Startups Must Register Software Copyright
• Section 80-IAC vs Section 140: Startup Tax Holiday 2026 Guide