General finance

Overdraft

An overdraft is a borrowing facility which allows you to overdraw on your bank account up to an agreed limit. It is available at any time and is usually used for day-to-day expenses to meet cashflow requirements.

It is normally agreed for a 12 month period but the bank has the right to ask for repayment of the amount of borrowing at any time. An overdraft is flexible, interest is charged only on the funds used, it is easy to arrange and there is no charge for repayment.

However, it is subject to annual review which will incur an arrangement fee, it is repayable on demand, the fees can be high if the limit is exceeded, the lender may require security, and the interest rate is variable which makes it difficult to calculate the costs.

Business Loan

A loan is an amount of money borrowed over a fixed period of time with an agreed repayment schedule.The amount of the repayments will depend on the size and duration of the loan and the rate of interest. Loans are generally requested to assist with purchasing business assets or for start-up capital and sometimes for repaying overdraft facilities which have become permanently overdrawn.

The rates and fees charged vary and can sometimes be negotiated. The Loan is provided for a known period, which is usually between three and ten years, some Loans offer a capital repayment holiday, which allows interest only payments for an agreed period of time which can assist cashflow, interest rates can normally be fixed for the term and will not therefore be affected by changes in the base rate and the amount of the repayments are known throughout the term of the loan and the arrangement fee is only required once at the start of the loan.

However, Loans are subject to strict terms and conditions, they are not very flexible, they are subject to making monthly repayments, the lender may require security, and there may be a charge if the loan is repaid before the agreed expiry date.