Vinu: Hey Manu, I keep hearing about Cash Credit (CC) and Working Capital Demand Loans (WCDL). Can you explain the difference between them?

Manu: Of course, Vinu. Both CC and WCDL are used to finance a company’s working capital needs, but they work quite differently.

Vinu: Let’s start with the basics. What’s the main difference between the two?

Manu: Well, CC is a revolving credit facility. You can withdraw money anytime within the sanctioned limit and repay it whenever you want. WCDL, on the other hand, is a fixed-term loan disbursed for a specific period, like 7 days to 1 year. The full loan amount is disbursed at once and has to be repaid at the end of the term.

Vinu: So with CC, I can use and repay as needed. But with WCDL, I get a lump sum and repay in one go?

Manu: Exactly! Also, the way interest is charged differs. In CC, interest is calculated on the daily outstanding balance — so if you use less, you pay less. But in WCDL, interest is fixed and charged on the full disbursed amount for the entire period, regardless of whether you use the funds fully or not.

Vinu: Interesting. What about documentation and interest rates?

Manu: For CC, there's a standard agreement, and once it's sanctioned, you can draw as needed. WCDL requires a loan agreement and a separate request each time you want a new tranche. However, WCDLs usually carry a slightly lower rate of interest compared to CC, especially since the bank gets better visibility over cash flows.

Vinu: Why do banks seem to prefer WCDL these days?

Manu: That’s a good question. Banks push WCDL because it helps them manage their asset-liability profile better. It gives them predictable interest income, lowers the cost of funds, and also improves credit discipline. Since the borrower has to repay in full at the end of the term, banks can track fund usage more effectively.

Vinu: Makes sense. From a borrower’s perspective, when should a company prefer CC and when should it choose WCDL?

Manu: It depends on the nature of the business and cash flows. If the cash flows are unpredictable and you need flexibility in drawing and repaying, CC is the better option. It allows you to pay interest only on what you use. But if your fund requirement is predictable for a short period and you want to lock in a lower interest rate, then WCDL is more suitable.

Vinu: So is there a smart way to use both?

Manu: Absolutely. Many savvy businesses use a mix. They use WCDL for planned, short-term needs — like buying inventory ahead of a festive season. And they keep CC for day-to-day fluctuations like sudden vendor payments or customer delays.

Vinu: Thanks, Manu. This was super helpful. I now understand not just the differences, but how to strategically use both facilities.

Manu: Glad to help, Vinu. Smart working capital finance is all about using the right mix of tools!