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Business Bank Loan/ overdraft question

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

  1. mma-max

    mma-max

    Joined:
    Oct 4, 2012
    Messages:
    26
    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

    kbees

    Joined:
    Sep 3, 2016
    Messages:
    4
    Hi,

    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

    Sc0tty

    Joined:
    Jan 19, 2010
    Messages:
    683
    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.
  4. PJ'

    PJ'

    Joined:
    Apr 19, 2017
    Messages:
    2
    A little late to the "party" but I thought I'd comment for future reference.

    In the current finance market following the Global Financial crisis, (now referred to as the "GFC" to make it acceptable), most young small and medium sized businesses cannot get a loan at an acceptable interest rate compared to the gross margin made on trade. Access to "secured" loans and hence reasonable interest rates from Banks or other established lenders is reserved for established, profitable, well managed businesses that can "recycle" the working capital for stock.

    Similarly most new and young small & medium businesses will not be granted an overdraft capable of funding reasonable stock purchases, especially if you order regularly.

    Trade finance works well for imports if you have a confirmed purchase order from a credit worthy buyer as you can trade both the PO "asset" and Invoice "asset" to raise first supply chain finance to purchase the stock and then use the far cheaper invoice finance to repay that debt. Overall in this scenario you could have finance for up to 210 days, not pay anything until the end of that period and the cost of finance would be less than 5%. No commitment, no on going fees and no risk of having the solution withdrawn.

    If you are trading B2C and/or via an ecommerce platform and therefore no PO then in the past few years many Revolving Credit Solutions, "RCF" have emerged. In essence they work exactly like an overdraft but the limits are far higher than most business will be offered by a Bank, are confirmed for a minimum of 12 months are strictly pay when use, for the amount used and for the duration used. No commitment, no ongoing fees and no early or part repayment penalties.

    Finally, as I'm probably boring you all now with all this finance stuff, there are a few "trade" hybrid solutions in the market that fuse the RCF concept with a Stock Loan. They can be used to purchase stock against a PO or without a PO. have facility limits that are assessed according to your annual trade, overseas manufacture timescale, stock turn days and GM and, just like the RCF are strictly pay when use solutions. These solutions can be used to purchase any type of import e.g. commodities, components, finished goods, machinery, services and even IP (rights to sell something in the UK granted by an overseas rights holder).

    In my experience there is not one solution that fits all businesses which is why my Firm specialises in trade, deals in person, and gets to understand the business in terms of what they do, how they do it and who they do it for before ever suggesting finance solutions. Those solutions must fit the business and must enable it to make a profit.

    Happy to answer any questions anyone may have on finance or funding for trade, especially imports. (That includes start-ups and new businesses because if the trade proposition is sound then you don't need any money yourself to get started).

    Wishing you continued success....
    PJ
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