According to the British Bankers Association's latest report on the subject, small businesses in the UK borrowed around £10.64 Billion, which was equal to 28% of the total borrowings, from major British banks in 2001. A business overdraft is often the best way to manage your day to day cash flow. It is a simple, cost effective way of getting extra cash when you need it. Typically, overdrafts are arranged for one year and renewable thereafter. The main benefits are:

• You only pay interest on the money that you borrow
• it is flexible to your needs
• It is easily arranged
• You can cover short term cash requirements

Overdrafts are an appropriate form of finance if used for a suitable purpose, such as short-term working capital. But over-reliance on overdrafts can focus managers' attention exclusively on short-term horizons and expose firms unnecessarily to economic fluctuations.

You can get tax relief on these loans. If you are a sole trader or partner, any interest you pay on a loan for business purposes is deductible against tax in working out your taxable profits. If you take on a loan to invest in your company you can get tax relief at your highest rate of tax on the interest you pay. To be eligible for this tax relief, you must either own more than 5% of the shares or own some shares and work for the greater part of your time for the company.

Action Checklist:

• Discuss the implications of borrowing with family and partners
• Check out the security required on the overdraft
• Check out the potential tax relief
• Polish your business plan
• Shop around for the best lender, comparing interest rates and repayment terms

If you are interested in finding out more about bank overdrafts or would like to talk to one of our consultants free of charge and without obligation then please go to the contact us section or telephone us on (020) 7016 9775.

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Last modified: 16/02/2005 20:12:09