An overdraft is one of the most common ways to finance your business.
If your need for money is likely to be fairly short-term (to cover a temporary
shortage of cash or modest start-up requirements, for example) an overdraft is
likely to be your best bet. You will need an up-to-date business plan to
present to potential lenders and to calculate how much money you need to
borrow. Spend some time revising this before you start talking to potential
lenders.
An overdraft is quick to arrange and relatively cheap. The serious
drawback with one is that the bank can call in the loan at any time. While this
does not happen very often, you can bet that if the bank does demand repayment
or reduction of the overdraft, it will happen when you can least afford
it.
Security
If your business has no assets, such
as debtors, to be taken as security for the overdraft, your bank manager will
probably require you to give some personal assets or a personal guarantee as
security even if you have formed a limited company. As a self-employed person
you are personally liable anyway, so no further guarantees are needed. In the
extreme, this means that if you cannot repay an overdraft, your assets,
including your house, could be seized to cover the debt.
Banks will often insist on property or debtors as the only acceptable
security on an overdraft. Always negotiate the level of security needed; it is
in your interests to give up as little as possible. You may wish to raise your
share of the funds by using your personal assets to act as security (for
example, a second mortgage on your home) or by giving a personal guarantee. You
must give this careful consideration and the bank may insist that you take
legal advice before you do. You should also discuss this decision with those it
will affect, such as your family and partners.
Tax relief
You can get tax relief on these
loans. If you are a sole trader or partner, any interest you pay on a loan for
business purposes is deductible against tax in working out your taxable
profits. If you take on a loan to invest in your company you can get tax relief
at your highest rate of tax on the interest you pay. To be eligible for this
tax relief, you must either own more than 5% of the shares or own some shares
and work for the greater part of your time for the company.
