Working Capital Facilities · Question

What is the difference between a working capital demand loan and cash credit?

Short answer

A working capital demand loan is a lump sum lent for a fixed period, usually a short one, and repaid or rolled over on the due date. Cash credit is a running account with a sanctioned ceiling that you draw on and repay as often as trading needs. The first suits a steady, predictable portion of funding, the second suits needs that rise and fall day to day.

In more detail

Lenders often carve a total working capital requirement into both. The demand loan covers the permanent core, meaning the level of stock and debtors that is almost never below a certain mark. The cash credit covers the fluctuating layer above that.

With a demand loan, the full amount is credited once and interest runs on the whole sum for the period, whether or not you needed all of it every day. You repay at maturity, and the lender may renew it if it is satisfied. With cash credit, interest is charged on the amount actually drawn each day, and the balance moves with your sales and collections, subject to the drawing power calculated from your stock and debtor statements.

A packaging unit offered both

A packaging unit has a base level of raw material and receivables it always carries, plus a seasonal surge before festive months. The lender offers a demand loan for the base level and a cash credit for the surge. The owner pays interest on the whole demand loan all year, but only on drawn amounts in the cash credit, so the surge funding costs less when idle.

Interest basis: whole sum for a demand loan versus daily drawn balance for cash credit.
Repayment: a dated bullet or instalment structure versus a limit that is reviewed and renewed.
Flexibility: a demand loan cannot be redrawn once repaid unless a fresh one is sanctioned.
Monitoring: cash credit usually brings closer scrutiny of statements and account movement.

Neither product is cheaper in the abstract. The lender's pricing, your usage pattern and how steady your core requirement is decide which combination costs you less. Ask for both options in writing with the interest basis, then compare using your own expected usage.

Key points

A demand loan is a fixed lump sum for a set period; cash credit is a revolving ceiling.
Interest runs on the whole demand loan but only on drawn balance in cash credit.
Banks often split need into a steady core and a fluctuating layer, using each product for one.
Cash credit draws are capped by drawing power based on current assets.
Compare using your own expected usage, not the headline rate alone.

Who this applies to

Owners offered both products in a sanction letter and unsure which carries the real cost.
Businesses with a steady base of stock and debtors plus seasonal peaks.
Finance heads reviewing the mix of facilities at renewal.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority. Lalsar Holdings' financial advisory and financing work is advisory and facilitation only. Lalsar Holdings is not a lender. Sanction and disbursement of any credit facility is at the sole discretion of the partner bank, NBFC, or financial institution involved, subject to their own eligibility criteria and credit policy.