8.2 - Bank Loans and Overdraft

A bank loan can be taken out by a business to finance it's activities. The business can borrow a specified sum of money from the bank with regular and set repayments for a specified period of time.

The bank charges an interest on this loan and will often require collateral to secure the loan, in the event of failure to repay the loan. Longer term loans have higher interest on them.

Bank overdrafts are another option, but these tend to be smaler in scale and designed to fet over short term cash flow issues.

The overdraft is a set limit and and that is the maximum the business can withdraw from it's bank account for it's business activities.

It's vital that any business that takes out a loan or an overdraft meets its repayments.

The business needs to decide carefully which is appropriate; loans or overdrafts, as they will each carry out different conditions. Overdrafts, for example, tend to carry much higher interest rate payments.

Business owners need to think carefully about cash flow issues, and how to manage (I.e. loans, overdrafts etc). Many perfectly good businesses fail because they do not manage their cash flow effectively.