Loan or overdraft?

Taking the simplest view possible ...

A loan has a set repayment period.

Your bank can demand you pay the balance of your overdraft at any time.

I know which I'd choose.
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I am an experienced web developer offering very reasonable rates.
I have no intention of striving to be the cheapest around.
Some people, it seems, will work for next to nothing.
I would much rather do the job properly.
As always, the choice is yours!

Not a lot to chose - it depends on when you are likely to be able to repay. If you expect positive cash flow quite quickly an OD may be a better bet as you can clear it down quickly – there is nothing worse than having money in the bank earning no interest and a great big loan account with penalties for early repayment.

The basic rule of thumb with funding is to match fund source with the type of spend. I.e. fund only current fluctuating cash flow (ie stock) via an OD. Money for longer terms items (ie fitting out costs) tends to be better from a longer term loan, no longer however than how long the item will last. Ie you wouldnt borrow for a PC that will last you 3 years over a 20 year period.

Your bank will advise, but don’t forget they are looking to make money out of you.

Also look at borrowing personally - it’s often a lot cheaper and less hoops to jump through for the same risk.

Regards,

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James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773

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Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT

Hi Voyager,

I think you'd need an exceptional banking history and asset structure to gain a £25K overdraft for a retail venture.  Similarly with a loan, tha bank will want to see a 'substantial' personal investment. I trust you have that covered within your research.

Cheers, Nigel

Speaking from personal experience, I chose to go fo rthe overdraft facility on my business to finance some expansion last year. The reason I chose OD as appose to loan was because I wanted to just borrow as little as needed and be able to pay it back as quickly as possible.
I took the view that with an OD, if I only needed 10k then that is all I would take and if I needed more then I could "dip into it". You need to manage yourself in that situation not to treat an OD like cash in the bank because it isn't really your money.
Now the OD is as good as cleared I'm glad I went down that route. The other benefit is that once you are out of the OD it can stay there should you ever need it again, you dont have to go through the whole re-application process

This is just my personal experience though, and may not be best for you.
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Richard Osborne
Quick Formations Limited
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I would always apply for an overdraft initially. Its a lot more flexible when starting up. It also can be re-negotiated from time to time and at short notice which is important when establishing your new business in the marketplace.

Chris
www.catering.iz4u.co.uk

Check out with business link the loan gaurentee scheme provided by the dti as well, they will cover you should things go horribly wrong for up to 75% of your loan which should make things a little easier if you need to borrow money.

Personally, i would rather do neither - just get out there and sell something to raise the cash.

We are in a pay as you go society and as a chappy who hit some financial difficultys a ferw years ago, and still recovering from it - i would always be relecutant to borrow money if i can source it by selling products for someone else

Thanks all - That's a big help.....

Voyager
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