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Business Bank Loan/ overdraft question

Discussion in 'Money, Accounts & Finance' started by mma-max, Jan 2, 2016.

  1. mma-max


    Oct 4, 2012
    I have a question regarding loan/overdraft. I'm planning to make a big stock purchase, and I need around 40k. To not disrupt my cash flow, I think I would need around 25k as a loan. To be honest I really need this loan for only 60days, as within this time I will easily get a full return from investment (other words - I plan to sell stock straight away, 60 days is just a worst case scenario)
    I can get a loan of 25k for 12months with a total cost of 27.7k (2.7k a year)
    I can get an overdraft for this amount at a cost £43 a month (fee) and 12.% a year rate.
    Overdraft is for 12 months so total would be 43x12= £516 in fees and approx £525 in interest (60 days) = total of £1041.
    Is there any downside to choosing overdraft over loan? Am I missing something? Can I cancel overdraft early or decrease it?
    My bank is Barclays. If anyone would know something about this, please let me know. Thanks
  2. kbees


    Sep 3, 2016

    Overdraft is for working capital is, as you said, repayable on demand. A loan is cash repayable over a period of time.

    If you are after a stocking finance go for a loan over 3 years max.

    Think of it this way a loan inputs cash into the business (I'll assume your business is profitable and can afford the repayments) providing your are managing your business and cash correctly the loan will provide a step up.

    For example 25K OD provides additional working capital not cash, you can use the w/c to increase your cash but this is dependant on margins. The OD can also be taken away or you become dependent on it, a going concerned, a business that would struggle if the bank pulled the OD.

    25K loan over 3 years provides cash that is yours (subject to keeping up repayments). After 3 years you can take out another 25K. Your business has now increased its cash and ability to buy more stock.

    Don't compare the cost as the concepts are different. A loan might appear more costly short term buts its benefits are medium / long term. It's also a good way to recycle your own credit line.

    Hope this helps.
  3. Sc0tty


    Jan 19, 2010
    I had a similar situation last year, opted for the overdraft. With Barclays aswell.

    The bank can remove the OD at any time. Though unlikely to if you are showing it being repaid. The bank told me an OD should be repaid in full every few months as that is how it is intended. So you will have a marker on your account for not repaying, but as long as they see the OD being managed you will be okay.

    You can cancel the OD at any time. You could reduce, but you may be subject to more fees.

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