Q: I have a small business that recently expanded, leaving money a bit tight for the short term. My bank has given me 24 hours to agree to halving my overdraft and refinancing the difference in a loan to be repaid over five years. Is this right legally and morally? I have a sound business with no debts.
Jul 14 2009
Answered by: Marc Barber Ask a question
Morals and banking are not necessarily words you see in the same sentence very often – especially under present circumstances. To be fair, the manager you are dealing with is just doing his job and is the mouthpiece of a whole list of people above giving the orders.
As far as legality is concerned, you will need to check the agreement that you have with the bank about your overdraft. It is very likely that your overdraft is repayable on demand, so what the bank is doing is probably legal and above board. Presumably, the rate of interest on the loan will be higher than that which applies to the overdraft – and there will probably be arrangement fees.
Leaving aside the cost issues, from the point of view of financial management, it does make sense that finance used to acquire a business is paid off over a longer period and not just added to an overdraft – after all, the investment in the new business should be expected to pay for itself, but over a longer period of time. By structuring the finance this way, the profits and cash generated from the new business will, over the five-year term, be able to repay the debt.
If you are still concerned, consider shopping around to other banks, although the answer may be the same in the present climate. In this case, it would be worth asking for more time rather than being ‘bounced’ into a decision.
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