Thursday, October 27, 2011

Bank Overdrafts vs Bank Loans [ a Comparison ]

Comparison of Bank Overdrafts and Bank Loans - [ useful Tips ! ]

The key advantages of overdrafts and loans in certain business situations:

Advantages of an overdraft over a loan

Customer only pays interest when overdrawn

Bank has flexibility to review and adjust the level of the overdraft facility, perhaps on a short-term basis

Overdraft can be effectively be used as a medium-term loan – the facility is simply renewed each time the bank comes to review it 

Being part of short-term debt, the overdraft balance is not normally included in calculations of the business’ financial gearing 

Advantages of a loan over an overdraft

Business and bank know precisely what the repayments of the loan will be and how much interest is payable and when. This makes cash flow planning more predictable

The loan is committed – the business does not have to worry about the loan being withdrawn whilst it complies with the terms of the loan

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