Bank Loan or Overdraft?

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fatandforty
fatandforty Registered Posts: 553 Epic contributor 🐘
My husband has a small printing business and it is suffering due to the credit crunch very badly. He is looking into buying a digital printing press to make himself more competitive and is considering a bank loan. Would it be best to take a loan or to try to extend our business overdraft facility? He would probably need to raise about £6K.

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  • blobbyh
    blobbyh Registered Posts: 2,415 Beyond epic contributor 🧙‍♂️
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    You'd need to look into the interest rates for both being offered but I would have thought a bank loan would be cheaper plus you have the freedom to shop around for a loan provider. Just had a quick Google and loans can be offered from just over 5% whereas an overdraft could be as high as 19.9% depending on the lender.
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    Thanks very much for that. A loan definitely sounds the cheaper route to go then.
  • speegs
    speegs Registered Posts: 854 Epic contributor 🐘
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    You also need to consider that an overdraft can be recalled by the bank with very little, or no, notice.
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    Thanks I didn't realise that. Don't know what we'd do if they recalled our current overdraft facility! Business is really dire at the moment. Might be back on in a couple of months asking advice on what to do when a company goes bust :-( Wouldn't have a clue on how to go about winding a business up. I have only been doing the books for a couple of years.
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    ...and with the new capital allowances regime, you can write the whole of the 6k off against tax. So when the tax man gives you a tax refund - he could pay off some of your loan/overdraft!!

    Regards

    Dean

    edit: I should probably add; I'm assuming your a small business with less than £50,000 worth of capital expenditure in the year.
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    Thanks for that Dean. Yes you are right to assume we definitely spend less than 50k on capital expenditure in a year. Please could you explain how we go about writing it off against tax? This is all a bit much for me! I only do a small amount of book keeping. Thanks again.
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    In 2008/09 the FYA (First Year Allowance) is being abolished and the AIA (Annual Investment Allowance) is coming in. The annual investment allowance is basically a 100% FYA on main pool additions up to £50,000.

    You should also be aware that the main pool is changing to the 'general pool' and the WDA is decreasing to 20%. This is also true for cars included in the general pool and for expensive cars and the restriction is remaining £3000. Environmentally friendly cars (emissions below 110) get a 100% allowance. A special-rate pool is also being introduced for things like integral features, and receives a 10% WDA.

    Sorry I kinda jumped in Dean but this is something I know about! I'm so excited!
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    No problem Gem, I see you got carried away with the details too. :001_smile:

    Fatandforty, how the relief is given is via the tax computation and the new AIA allowances.

    For absolute simplicity; think of it as another charge to the profit and loss account instead of a charge to the balance sheet.

    Regards

    Dean
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    Does any of that make any difference as to how I post the loan/purchase into sage? Really appreciate everybodys help.
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    You'll have to raise a purchase invoice and clear it via the loan. I don't actually use sage but you'll probably have some sort of 'allocation' within the purchase ledger.

    Regards

    Dean
  • mark130273
    mark130273 Registered Posts: 4,234 Beyond epic contributor 🧙‍♂️
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    overdraft is a lot easier than a loan to put into sage as you have to split a loan amount into under 1 year, 1-2 years, 2-5 years and any amount above and change it every year !!

    so use overdraft if you want an easier sage life !
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    Are you incorporated? I thought you only had to split if you were ltd and if you're unincorporated you just have a bank loan shown as a liability on the BS
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    Mark, if only life were that simple!! However, I suspect a business owner would be more interested it what it will cost him over a period of time instead of making a bookkeepers life easy.

    Gem, without going into detail, your thoughts are correct. However, there's nothing to stop them using the full standard if they want to.

    Regards

    Dean
  • Jan
    Jan Registered Posts: 654 Epic contributor 🐘
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    FandF

    How I have done it in the past is:-
    Allocated the purchase invoice to 0020 - plant and machinery.
    Dr Loan Acc -eg 2301 and Dr Bank with the amount of the loan. When you pay the supplier invoice you will Credit bank, Dr Creditor ie the Supplier.
    Your loan repayments will then Dr Loan Cr Bank each month and reduce the amount of the loan.
    I realsie these are only the bookkeeping entries, as it does not take into account the interest charged on the loan, but I presume you will not be producing your partners accounts just yet. Your accountant will make the adjustments then - just keep all the paperwork with the records.

    Don't take Marks advice seriously - ever :001_smile:

    And good luck with the business - we are living in interestiing and testing times!!
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    Thanks Jan that is brilliant. Even I can follow those entries. Thanks so much for making it so simple for me. So much of this goes straight over my head! I have to produce the end of year at the end of next month to give to the accountant. We won't be paying any corporation tax next year that's for sure!!
  • Jan
    Jan Registered Posts: 654 Epic contributor 🐘
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    :001_smile: You won't be paying corporation tax unless you become a Ltd Co!

    Technician level studies !
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    Yes we are a limited company. We paid corporation tax last year.
  • Jan
    Jan Registered Posts: 654 Epic contributor 🐘
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    :blushing: Must have missed that bit!! :blushing:
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    I don't believe I mentioned it before. Does it make a difference?
  • Jan
    Jan Registered Posts: 654 Epic contributor 🐘
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    Not to the bookkeeping, I think Dean/Gem answered the tax implications!
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    Sorry this is a bit off topic, could be a question for Dean.
    I know that a group only gets one AIA
    And related/associated companies only get one AIA
    And that 2 connected sole traders/pships get one AIA
    But what about companies with a sole director or controlling party who also has a sole trade?
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor 🧙‍♂️
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    I'm almost positive that as they are 2 separate legal entities you get two AIA's, one for each.

    Perhaps Dean can confirm?
  • CJC
    CJC Registered Posts: 1,657 Beyond epic contributor 🧙‍♂️
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    Ummm, as if proof were needed that I'm not a real accountant... what's an AIA?
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    Chris I did an essay on it in the first page :(

    Thanks Annette
  • CJC
    CJC Registered Posts: 1,657 Beyond epic contributor 🧙‍♂️
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    Oh dear, so you did.

    Looks at shoes and shuffles feet embarassdly :blushing:
  • blobbyh
    blobbyh Registered Posts: 2,415 Beyond epic contributor 🧙‍♂️
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    Gem7321 wrote: »
    Chris I did an essay on it in the first page

    I think we were distracted by the thought of you jumping up and down excitedly while clapping like a seal Gem...

    ...okay so it might have just been me.
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    I'm almost positive that as they are 2 separate legal entities you get two AIA's, one for each.

    Perhaps Dean can confirm?

    I haven't checked but I would go along with that - providing that the two entities carry out different trades. If they were to carry out the same trade there is a possibility that the 'associated' rules will bite under anti-avoidance measures and therefore only one pool allowed.

    Regards

    Dean
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    blobbyh wrote: »
    I think we were distracted by the thought of you jumping up and down excitedly while clapping like a seal Gem...

    ...okay so it might have just been me.

    I love tax rules!

    Thanks Dean
  • mark130273
    mark130273 Registered Posts: 4,234 Beyond epic contributor 🧙‍♂️
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    thats just said that you actually love TAX rules ??
  • fatandforty
    fatandforty Registered Posts: 553 Epic contributor 🐘
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    Jan wrote: »
    FandF

    How I have done it in the past is:-
    Allocated the purchase invoice to 0020 - plant and machinery.
    Dr Loan Acc -eg 2301 and Dr Bank with the amount of the loan. When you pay the supplier invoice you will Credit bank, Dr Creditor ie the Supplier.
    Your loan repayments will then Dr Loan Cr Bank each month and reduce the amount of the loan.
    I realsie these are only the bookkeeping entries, as it does not take into account the interest charged on the loan, but I presume you will not be producing your partners accounts just yet. Your accountant will make the adjustments then - just keep all the paperwork with the records.

    Don't take Marks advice seriously - ever :001_smile:

    And good luck with the business - we are living in interestiing and testing times!!

    Definitely testing - we have just had the worse month in over 20 years :-(
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