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Thread: Overdraft or loan

  1. #1
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    Overdraft or loan

    Considering this is a business forum all the members here are clever well organized businessmen with business plans in place , use their overdrafts the way they are designed to be used etc etc.

    However there are a few of us who shouldn't be businessmen because we didn't open our business to be become businessman rather tradesman who felt they could do it on their own and get rich. I might just be talking about myself, anyway back to the topic.

    So you go bank you don't have a business plan etc etc but you "need" a little extra money for a project. You have been running your business for longer than 6 months so the bank has a profile on your account and there has been X amount of turnover ( FNB I was told will only consider it after 12 months unless you have some form of surety). They are prepared to talk.

    This is my take on overdrafts and credit limits, this is why I made the comment earlier, I don't manage credit limits and overdrafts very well. I would rather have a zero or very low credit or overdraft limit on my accounts than a huge amount which I can never afford to get out of. I would rather take loan and pay it back than sit with the expense of having to pay fees and interest on an amount for the rest of my business life. The other big issue I have and got properly caught with is when you have a couple bad months, that interest can bite you lekker . To top it all if you just don't get through that rough patch now suddenly you have this huge amount to pay up before you can move forward.

    I know you fellas all manage your account properly and don't have this type issue but for some of us less mature tradesman like to spend rather than save. I know I should get my knuckles smacked for being naughty, unfortunately it is a reality for me.

    So what do I do take a 100 grand loan to finance a job or increase my overdraft by 100 grand then sit with that interest for years to come, because I think like a fool when it comes to money.

    I am at that point right now were I either need to increase my overdraft or take a loan or sell something to feed my family, not because I haven't been working but because I jumped into a fair size project which was worth my whole years turnover, finished the project without taking into consideration what if ...I don't get paid on time.

    This is were I believe many small contractors fail, we get busy, lots of work comes our way, we grab it with both hands and "trust" people. The company then uses you to finance their lifestyle or keep their company going while you sit as the last person in the payment chain begging for your money.

    The catch is you need to keep going so this is were overdrafts credit limits are stretched to the max and you make or break, unfortunately more break than make.

    Anyway you look at it as soon as you go into the red no matter what you decide overdraft or loan you need to be aware that it could be the breaking point of your business. The more credit you get, the longer it takes to finish you off. With a less than 50 % ( just a figue...not sure of the exact figue off hand)chance of survival in SA it is quite a gamble.

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    Quote: "Considering this is a business forum all the members here are clever well organized businessmen with business plans in place , use their overdrafts the way they are designed to be used etc etc. "

    Not true,Ian. How i wish i were a tradesman like you, What you're in need of is bridging finance, until your payment is received.Not longer than a year where you're paying ongoing interest.

    Now for that bridging finance, regretfully i'll have to leave it to members more in tune with this sort of thing than i am. They will probably ask if the work has been invoiced & the caliber (money-wise) of your customer. No doubt you did your homework with respect to credit worthiness of this customer before commencing the project

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    Moderator IanF's Avatar
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    Ian
    Can you approach the customer for a letter stating that you have done the work and they will pay you on such a date, just say you need this for bridging finance, for wages and suppliers. This will make them aware you are a small business and they may even pay you early. If not use that letter to go to the bank for a temporary loan.
    I have never done this but would do it if I got into a pickle with a big job.
    Good luck
    Only stress when you can change the outcome!

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    Gold Member Houses4Rent's Avatar
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    No idea really, but as much as I hate to pay deposits maybe its worth your while to ask for one next time if a project is that big and critical to your cash flow survival.
    Houses4Rent
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    A deposit was paid, just wait for the final settlement. It just so happened that I am in this position which is a good example of why you would generally need an overdraft.

    The point I was trying to make is what to do if you need an overdraft because some of us don't manage our finances correctly, it would be better for a person like me to take a short term loan rather than have an overdraft. The reason I say this is because when I get facilty that were it seems to stay at the limit, 6 months down the line I need to increase it again to cover all the interest.

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    Flaker, what I need is better business sense 😉

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    I am certainly not a well organised business man but there are several ways that we use to easing cash flow or making it work for us.

    1.Take a deposit before starting the job.Ask for COD or arrange payment terms before doing the job.Cash is king.Choose your customers wisely!
    2.As said in one of the posts,use bridging finance/factoring/invoice discounting instead of an overdraft facility.I am sure that there are pro's and con's for both but the way our business is structured the invoice discounting works for us.We also use a stock discounting facility which helps our cashflow in peak times.
    3.Use your suppliers as the bank.Try negotiate longer terms.Stretch the payment terms but do not jeopardize your relationships.


    With the invoice discounting we get 80% of the invoice value within 2 days of invoicing and the 20% balance once the invoice is paid.You do pay interest on the amount that the bank gives you but at least you know that the money is coming.

    At the end of the day try keep the money in your account for as long as possible!

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    Moderator IanF's Avatar
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    Ian how do you calculate the deposit, I look what my hard costs are eg. materials and labour so at least these costs aren't an out of pocket expense. Don't be shy when asking for money.
    Only stress when you can change the outcome!

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    Quote Originally Posted by ians View Post
    The point I was trying to make is what to do if you need an overdraft because some of us don't manage our finances correctly, it would be better for a person like me to take a short term loan rather than have an overdraft. The reason I say this is because when I get facilty that were it seems to stay at the limit, 6 months down the line I need to increase it again to cover all the interest.
    Overdrafts are very risky instruments, especially if you are not the accountant type. The bank can demand repayment immediately if they wish, and chances are they'll do it at a time that you cannot repay. Hardly anybody in the small business environment uses them "properly". Basically we tend to spend the money if its there, and not leave it as a backup for emergencies. In any event "emergencies" tend to crop up frequently. Also the banks are now charging you if you don't use your overdraft.

    They are however very convenient instruments. I personally would go for the short term loan, because then you are forced to pay it back and once you have its finished and klaar. The overdraft tends to linger.

    Keep in mind, my advice is from a personal point of view, having been burnt by overdraft facilities in the past.

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    Bus fact...ditto, at one stage, between my overdraft and credit card they got so out of hand I didn't know how I was even going to keep up the min payment. Got a job which paid them both off and at the same time reduced them to a manageable amount.

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