Loan Vs overdraft for startup - or both?

[Keri-UK]

Hi, I'm preparing a business plan for the bank to get finance for stock/expansion in a new business - up until now has effectively been small scale test-trading to explore the market (so it can be treated as a startup really).

I was assuming I'd be asking for a normal business loan (probably supported by the 75% security provided by the Small Firms Loan Guarantee Scheme as I don't have any property). I need in the region of £25-35k but there's plenty of scope to scale up or down within the business model and still have it work.

However I saw an example business plan where the owner was asking for about a 50/50 split on the funds from a business loan and an agreed big overdraft. This hadn't occurred to me, and I wondered what people thought about the pros and cons of the overdraft idea....and if the bank will dislike the idea!

My thoughts so far are:

Pros:

1 - With the overdraft I won't be paying interest on any funds that are not being used, this is a big help as the nature of the business involves getting stock made in large batches.
2 - Again I won't be paying the SFLGS's 2% p/a on the whole ballance available to me, just the loan part.



Cons:

1 - The bank will want more security?
2 - The interest rate might be higher than on a loan?
3 - There are annual fees

Any comments would be greatly appreciated!

[tkessex]

If you don't have any security you're going to struggle to get finance, in any form, to the value of £25-35k. Banks will generally only consider lending without security when you need in the region of £15,000, and they will expect you to cover half of that yourself (so they're only lending £7,500).

With regard to the loan versus overdraft argument, I would suggest the latter is better suited to your needs. Money is borrowed only when you need it, so interest payments are minimised, and spending can be monitored by the bank to ensure that you don't get in to difficulty. But it's probably something you should discuss with your chosen lender (don't try Barclays though, I went to the latter and they lost all of my personal documentation - bank statements, credit reports, personal information, client information, website ownership details offering access to me debit card information) - they'll always be better placed to help.

[Ian J]

I wouldn't concern yourself with the odd extra percent interest here and there as your major concern should be finding someone who will actually lend you the money. My feeling is that whilst the SFLGS may be a possibility I doubt whether you will find any bank to give you an unsecured overdraft for the sort of sums you mention