We continue to hear horror stories about businesses having their overdrafts pulled by the bank. For years we have been advising customers to avoid bank overdrafts at all costs. Overdrafts are repayable on demand and the banks can and will demand repayment at a moments notice.
I was with an insolvency practitioner yesterday whom had witnessed one of the worst examples of an overdraft being pulled by a high street bank. The customer had a £800k overdraft which was secured against a personal property which had approx £450k equity. The bank gave the customer 6 months to reduce the overdraft by £400k. The customer did so by increasing terms with creditors, cutting staff and organising an arrangement with the inland revenue for Paye and tax arrears. As soon as the overdraft was down at £400k the customer was called into the bank the overdraft was officially withdrawn, the business went bust, his house was repossessed and the owner /managing director was made bankrupt. Now I know this sounds a bit harsh and there are two sides to every story but these kind of scenarios can often be avoided.
If possible using a factoring or invoice discounting is always more advisable than using a bank overdraft. The facility can often provide more cash than an overdraft, it isn’t repayable on demand and it will grow with the business. Secondly where possible always use a hire purchase or leasing facility to purchase capital equipment. These are stand alone finance products and are again are not repayable on demand. Remember cash is king!!!!!!
