Overdraft vs Loan, Cheapest and best option for purchasing assets

[SebSmith21]

Hi There,

I am a 21 year old entrepreneur looking at getting a bit of a boost to start the ball rolling with my eCommerce business. I need £5,000 to purchase the stock needed to get it jump started. I just wanted to pick your brains and see peoples views on overdrafts vs loans and also which are people preferred places to go for to get these.

Any help would be greatly appreciated.

Kind Regards
Seb

 

[finleydesign]

Hi, Can I first ask, why do you need purchase stock?

 

[SebSmith21]

I've had issues with running out of stock and not being able to sell whilst I wait for more to arrive. With a 30-40 day production time I loose my SEO rankings when I am not selling, I need to keep the stock flow running smoothly.

 

[finleydesign]

Good problem to have but you lose SEO rankings when your not selling? how does that work??

 

[SebSmith21]

Well, I'm new to all this really. With selling on Amazon for example you loose traction when you're not selling and its harder to sell again once you've finally got stock back in. My terminology must be wrong then

 

[finleydesign]

And what would happen when you buy £5K of stock and it didn't sell?

 

[Mr D]

Neither is great but which meets your needs short term & long term?

 

[Mark T Jones]

If you absolutely need money, then i'd go for a start up loan (on the basis that they might actually offer you one)

However, as above, borrowing for stock in a variable environment is a high risk game

 

[iOzefini]

is it difficult to get start up loan?

 

[Mark T Jones]

is it difficult to get start up loan?

Define difficult

In a nutshell if you have the determination it takes to run a business, you have the determination to apply for a loan

 

[iOzefini]

It is better if I do the business plan or I need the profesional one?

 

[LiveNetworks Ltd]

I'm going to stick my neck out and disagree slightly with Mark.

The rule of thumb is that you should borrow over a term relative to the purpose, so an asset lasting 5 years, borrow for 3 to 5 years.

In the case of an overdraft, it's generally going to be more expensive than a loan, but if you're going to anticipate needing £5K of borrowing for the entire year to support stock then a 6 or 12 month loan may be right for you. Remember that you can pay an overdraft off at any time and the interest is only charged on what you owe, vs a loan that may include a penalty charge for early repayment and will have the interest charge calculated on day 1 for the entire duration of the loan.

Ask you supplier about credit terms as 30 days credit from when the goods arrive with you, may be sufficient to cover your financing needs.

 

[Mark T Jones]

I'm going to stick my neck out and disagree slightly with Mark.

The rule of thumb is that you should borrow over a term relative to the purpose, so an asset lasting 5 years, borrow for 3 to 5 years.

In the case of an overdraft, it's generally going to be more expensive than a loan, but if you're going to anticipate needing £5K of borrowing for the entire year to support stock then a 6 or 12 month loan may be right for you. Remember that you can pay an overdraft off at any time and the interest is only charged on what you owe, vs a loan that may include a penalty charge for early repayment and will have the interest charge calculated on day 1 for the entire duration of the loan.

Ask you supplier about credit terms as 30 days credit from when the goods arrive with you, may be sufficient to cover your financing needs.

I completely agree.

But the real question is whether someone will actually offer an overdraft.

 

[LiveNetworks Ltd]

No history, unlikely, thats why supplier credit may be a better option, but sounds risky all round.

 

[SebSmith21]

I have worded the original post wrong, I have been trading for a nearly 12 months and already sold products making good margin and getting satisfied customers.

 

[Mr D]

I have worded the original post wrong, I have been trading for a nearly 12 months and already sold products making good margin and getting satisfied customers.

A few years may help.
Almost 12 months is slightly better than a week but some lenders prefer multiple years.

 

[Gordon - Commercial Finance]

Presume you've no friends and family who could front you £5,000 on a promise?