Cashflow- overdraft V loan repayments

[Sid]

Short term cashflow issues can mean poor decisions are made at times.

But which is the most tax efficient and savy way to deal with it.

Pause capital repayments on long term loan and keep OD at current rate

OR

Increase OD and keep up capital repayments.

Long and short term ups and downs will differ.
Bank managers thoughts may differ to accountants?

 

[CPF]

Sell something.
That’s your best option because you’ve cashflow shortage may never come right you’re only getting in deeper.

 

[Sid]

Sell something.
That’s your best option because you’ve cashflow shortage may never come right you’re only getting in deeper.

Is more of a look back in reflection.

TB can prevent that with stock. Depending on age of course.

 

[livestock 1]

Short term cashflow issues can mean poor decisions are made at times.

But which is the most tax efficient and savy way to deal with it.

Pause capital repayments on long term loan and keep OD at current rate

OR

Increase OD and keep up capital repayments.

Long and short term ups and downs will differ.
Bank managers thoughts may differ to accountants?

It will depend on your circumstances
If your net worth or net asset is strong and has been rising and looks good against your total debt then it’s a good idea to increase the od plus carry on with the loan payments
If the net worth or net asset is low and reducing then it might be better to postpone some payments
Also depends what you need the money for any what your plans are
Borrowing is a tick box thing now

 

[Courier]

If you’re with HSBC then better on a loan so they can’t change their mind at a whim…

 

[midlandslad]

The danger is the loan repayments are made through an increasing overdraft, very common.

 

[Tarw Coch]

Bank managers thoughts may differ to accountants?

Hopefully you’re paying the accountant to work for you, who's paying the bank manager

 

[Sid]

The danger is the loan repayments are made through an increasing overdraft, very common.

Does it not depend on the asset being paid off by the loan. Depreciating or appreciating.
If net worth increasing either via stock or asset value that will bring value back into the business

 

[midlandslad]

Cash is king though, if you can’t meet the cash requirements you are only as good as the bank lending you the money.

 

[betweenthelines]

Not much sense in borrowing money to pay back a loan. Like getting on a payday loan treadmill.

 

[B R C]

In effect with mortgage and overdraft you are doing exactly that, overdraft covers cash flow shortfall to pay outgoings one of which is mortgage. I would increase the overdraft as long as there is a good reason and will come back down again.

 

[Werzle]

Its all alright until short cash flow issues turn into longterm cash flow issues. Overdrafts are for dipping into not living on, and getting deeper and deeper into debt in the "hope" of doing better is dangerous.

 

[livestock 1]

Does it not depend on the asset being paid off by the loan. Depreciating or appreciating.
If net worth increasing either via stock or asset value that will bring value back into the business

It does very much make a big difference if your loan is to pay off an appreciating asset. This is the name of the game and more money (especially in agriculture) but also in property can be made from leverage than from the business itself at times. The only downside is you need to demonstrate serviceability of the loans attached to the business.

 

[nonemouse]

Its all alright until short cash flow issues turn into longterm cash flow issues. Overdrafts are for dipping into not living on, and getting deeper and deeper into debt in the "hope" of doing better is dangerous.

Even if your name is Rishi and your wife’s family is loaded

 

[farmerdan7618]

The tax is irrelevant on this, you get relief on the interest charges on either. No tax relief on the capital repayment or any reduction in overdraft.

So it comes down to which is cheaper. Depends on the rates, but a good rule is that an overdraft should be cleared at least once a year, otherwise a loan will be cheaper. Don't forget the overdraft has an annual arrangement fee.

So @Sid pause on the capital repayments most likely to leave you with more money, even after the tax is a little higher.

 

[chipchap]

A loan is much cheaper than an overdraft at the same interest rate, simply because the fees are only charged once, rather than annually for an overdraft facility.
The annual fee for an overdraft is charged on the total amount, whether you use the facility or not.

We have been running a loan for some time, but currently have no overdraft facility.

 

[Kiwi Pete]

Overdraft is usually charged at a much higher rate than loans (here, not sure about your banks' policy) so it makes sense to pause repayments and keep your OD facility as an OD?

It makes little sense to borrow money at 10% to pay a loan repayment at 5%, unless it is for a very short period of time (weeks) in which case it may be better to do the opposite

 

[chickens and wheat]

We pay for annual overdraft each year, more than needed, for fear that if we didnt for one year we might never get the facility again.
Bank manager swears blind that would not be the case. But glad I had the option this year otherwise harvest grain would have all been sold way too early.

 

[db9go]

Loans do not cause to much trouble if set up correctly and you make the repayment.
Were people go wrong is with over drafts as they can and some times
will be called in with out notice.
So many people buy stuff on over draft and then hit a bad patch and that is when the bank get itchy
loans are for long term borrowing and over draft are just that for that short time.
More go wrong with over drafts than anything

 

[midlandslad]

Loans do not cause to much trouble if set up correctly and you make the repayment.
Were people go wrong is with over drafts as they can and some times
will be called in with out notice.
So many people buy stuff on over draft and then hit a bad patch and that is when the bank get itchy
loans are for long term borrowing and over draft are just that for that short time.
More go wrong with over drafts than anything

We often see people structuring a loan over too short a period and using the ever increasing overdraft to pay the loan off.

Overdrafts should be repaid in full at least once a year or else there is hardcore long term debt which would be best structured on a loan.

Overdrafts are payable on demand and can often be used as leverage by a bank. Heard of a lot of people who had very good rates on loans that the banks couldn’t review so they called in the overdrafts to make them default.