Overdrafts and Bank Loans -

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Overdrafts and Bank Loans

4. Minimising Costs

4.1 Do what you can to improve your credit score.

Most banks evaluate businesses using a process of credit-scoring. While each bank's system is different, they tend to focus on:

How good your security is (see 5).
How low your gearing is and how strong your balance sheet is. Putting more share capital (or unsecured director's loans) into the business may reduce the interest-rate margin demanded by the bank.
What your cashflow projections are. Your cashflow projections should be credible and should demonstrate that you can comfortably meet interest payments and loan repayments.(See Managing your cashflow).
Your past banking record. For example, whether there have been problems with previous loans or overdrafts (including your personal banking or other businesses you are associated with).
Your business' past financial performance.
How professional your business plan is. This includes credible commercial plans, not just profit and cashflow forecasts.(See Writing a business plan).
How expensive the financing will be for the bank to administer. It may be cheaper to consolidate all your borrowings with one bank.

4.2 Ask the bank to calculate and itemise the total cost of any overdraft or loan offer.

The total amount you will pay over the life of the financing provides a rough guide.
For a loan, the total cost of interest and all charges can usually be expressed as an annual percentage rate (APR).

4.3 Shop around.

Then negotiate for a lower interest rate and lower charges (even if you have only received one offer of finance).

A bank is usually more willing to improve its offer if you have other quotes. Your negotiations are more likely to succeed if you have a good credit score or have a good relationship with your bank.
Most banks will only provide a quote once you have completed a full application for finance and they have assessed its viability.

4.4 Build a relationship with your bank manager, so the bank will be more supportive if you need additional financein the future.

Provide periodic management and financial information. Notify the bank of any major business decisions. (See Managing your creditors).

Most bank loans are secured with a fixed charge.

You may be asked to sign a debenture agreement to provide the bank with a fixed charge.

Typical fixed charges are over a property (for example, a mortgage ona house), fixed plant and machinery,or debtors.

Some debts may be covered by a floating charge.

The charge floats on some or all of a company's assets, even though these assets come and go in the ordinary course of doing business. It can cover stock, work in progress, furniture and equipment, and also goodwill and other unspecified assets.

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