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LOANS AND OVERDRAFTS |
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> The truth about loans and overdrafts |
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The banks are the largest providers of loans and overdrafts in
the UK and they will generally secure their loans and overdrafts against the
assets of the business. The banks offer a number of ways to help you manage
your cash flow and the costs associated with loans and overdrafts such as
fixed interest rates, interest collars and interest caps.
Loans
A loan is for a fixed amount with a fixed repayment schedule. Term loans are
most suitable for funding fixed assets and core borrowing. Although the
interest rate may be slightly less than on an overdraft there is no
opportunity to flex the amount of financing. When the level of financing
required is likely to go up and down it is important to choose a form of
finance that does not require you to pay for funds you are not using.
Therefore, a term loan is suitable for financing fixed assets but not
working capital. The term of the loan should not generally exceed the
expected life of the asset it is financing.
The key advantages of a term loan are that you know what the repayments are
and can budget accordingly and the APR may be lower. Banks generally attach
various terms and conditions (covenants) to granting loans which must be
complied with throughout the term of the loan. The Small Firms Loan
Guarantee Scheme guarantees loans from the banks and other financial
institutions for small firms that have viable business proposals but who
have tried and failed to get a conventional loan because of a lack of
security.
Overdrafts
Overdrafts are a flexible form of bank lending which should only be used to
finance the short-term working capital requirements of your business.
Overdrafts are not appropriate as a source of long-term finance as they are
repayable upon demand. The key advantage of an overdraft is that you only
pay for the funds you use. Typically the rate of interest will be between 3%
and 7% over the bank’s base rate, depending on the level of risk. |
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