# General Business Category > Business Finance Forum >  Overdraft or loan

## ians

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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## flaker

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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## IanF

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

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## Houses4Rent

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.

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## ians

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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## ians

Flaker, what I need is better business sense 😉

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## roryf

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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## IanF

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.

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## BusFact

> 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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## ians

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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## Dave A

> 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.


If you end up on a big project where you've got a client owing you more than 10% of your book, I reckon the short answer is make sure you get deposits and progress payments.

Otherwise, as you say, you really are exposed. And it's probably only a matter of time before you get taken for a ride.

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## ians

Dave you been quiet. Just got back from a trip to an exotic island, spend all the deposit money collected 😜

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## Dave A

You cannot believe what my life has been like the last couple of weeks...
Hectic doesn't begin to describe it.
Good hectic, mind you. Lots of good things happening.

But hectic nonetheless.

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## ians

That's good news. I just want to get my ducks in a row with my little operations because I believe things are gona get busy soon, going commercial with my hobbies.  If all goes well I could be learning to program a CNC soon.

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## flaker

Ian, Good luck mate on the venture. Just pity us idiots who don't even know what CNC is  :Confused:

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## ians

"Computer numerical control"

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## BusFact

Not sure whether I should have posted this in a banking charges thread or here. Chose here instead as it may affect someone considering an overdraft:

In the space of one month I received the following fees for running a small company overdraft:

1) Interest on the portion of the facility which I used.
2) A charge for the portion which I didn't use.
3) An annual charge of R2000 to review my facility ( perhaps it took a team of 10 people to do this ??? and no, its not something I requested nor is there a change in the facility)
4) A R44 charge to pay themselves for the facility review fee (cherry on the top)

My issue with the banks is not normally their fees, it tends to be their lending practices, but this one took me a bit by surprise.

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## Justloadit

> Not sure whether I should have posted this in a banking charges thread or here. Chose here instead as it may affect someone considering an overdraft:
> 
> In the space of one month I received the following fees for running a small company overdraft:
> 
> 1) Interest on the portion of the facility which I used.
> 2) A charge for the portion which I didn't use.
> 3) An annual charge of R2000 to review my facility ( perhaps it took a team of 10 people to do this ??? and no, its not something I requested nor is there a change in the facility)
> 4) A R44 charge to pay themselves for the facility review fee (cherry on the top)
> 
> My issue with the banks is not normally their fees, it tends to be their lending practices, but this one took me a bit by surprise.


You must be referring to Stranded bank.

With FNB there is a yearly review, in my case because of the amount it is R4000.00, however the manager comes and visits, and brings the paper work for me to sign and accept the terms and conditions. Every time I read the terms and conditions before I sign, and always check under the surety side of it. It states the amount of the over draft only, nothing else, and for the exact amount I have requested.

I had opted for an overdraft rather than a loan, simply because of the business model. Although the model has changed, but I simply took the cost of the overdraft as an expense to facilitate the business, and in the grand scheme of things, which was about turning money over on a daily basis with a very small margin, but accumulative over the month to be approximately 35% of the over draft amount. The cost of the overdraft in my case was less than 10% of my gross profit.

Before choosing, ensure that you are taking it for the right reasons.

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## Dave A

> 3) An annual charge of R2000 to review my facility ( perhaps it took a team of 10 people to do this ??? and no, its not something I requested nor is there a change in the facility)


Which bank?
I certainly haven't been hit with this one
(Yet?)

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## BusFact

Standard. I get it annually, although I don't remember it being so high. Will investigate further.

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## wynn

I am in the middle of a situation, OK my credit at certain suppliers is temporarily curtailed, but I am surviving.

In May I supplied a large amount of material to a contractor with a direct cession with the client Municipality in place, should be easy right?
Not so, the contractor does not have secure storage at the job site so he is keeping all the materials at his own workshop till he needs them, so far so good, the consultant will only issue a payment certificate for material on site, so payment will be a long time coming, but it will come eventually.

In the mean time I have told all my suppliers that they will be paid when I get paid or before if I get some extra liquidity on hand, this happened yesterday and I managed to pay one of the suppliers what I owed him.

Now had I been using an overdraft facility and gone into the same situation after three months the bank would have closed my facility and the money I earned yesterday would have just gone into a bottomless pit and I would have been in the same situation as before except that now I wouldn't have a facility and the bank would be twitching every time I wanted to withdraw funds.

So my advice, make your suppliers carry the amount owed, the new rules mean they have to carry on with your original credit agreement after you pay them back so effectively you get an interest free loan to bide you over the lean time, OK the temporary credit squeeze is sometimes hard to bear but infinitely better than dealing with a bank who have whole departments just to make your life difficult.

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## Justloadit

> Now had I been using an overdraft facility and gone into the same situation after three months the bank would have closed my facility and the money I earned yesterday would have just gone into a bottomless pit and I would have been in the same situation as before except that now I wouldn't have a facility and the bank would be twitching every time I wanted to withdraw funds.


Not sure what you mean by this statement. The fact that you have used the overdraft to the full amount, does not mean the bank is going to close the facility down.

Provided there is continuous movement in the account, the bank is happy. I have been in permanent overdraft for some 10 years, only only recently have manged to pull out of it, and at no time was I ever requested to pay all the money in at one time. Of course to get the over draft in the first place, you require collateral, or else they will not give it to you. In my case it was my home, and I was constantly aware of the implications, if something went wrong. 

My philosophy has always been that I never get involved in a deal if I can not afford it if it goes South with the current investments I have at my disposal, and in no way influence the security of my family. In other words research any deal very carefully, and always assume the worst case scenario before climbing into it, especially when supplying a third party, I get extremely nervous, if I am not in financial control of the deal.

Had a friend who was taken out by a third party, who got the tender because of BEE, and passed the work onto him, since he had been doing it for years. When the third party got paid, they basically disappeared of the face of the earth, and my friend had to contend with suppliers bills.

As I have said before, an overdraft must be used as a tool and not to satisfy impulse purchases. Plan how it is to be used.

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## Dave A

> Standard. I get it annually


 :Hmmm:  Interesting.

I've double checked and I've certainly not been hit with this one before - not for a business account OD facility anyway.
(I don't have a personal OD)

I also see my facilities are up for review this month, so I'll be sure to keep an eye on things and report back...

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