Running your business in credit could be better for your health and your bank balance

A client of mine who had spent years juggling farm debt and big overdrafts, contacted me for advice. I assisted and encouraged him to alter the way he ran his financial affairs. After making these changes, the difference I saw in my client inspired me to look at the issues and write this article.

There are basically two models to run your business finances on; let's take a look at them:

You have your term debt, say$2,000,000
plus overdraft facility of maximum$200,000
Annual cost
Term debt 2,000,000 @ 9% interest$180,000
Overdraft, allow average of 150,000 @ 12% interest$18,000
Annual cost to service funds$198,000
Working in Credit
Term debt, say $2,200,000
Annual cost of interest on $2,200,000 @ 9% interest$198,000

The annual cost of funds is the same however you may have $100,000 on deposit at your bank when not in use.
Say $100,000 @ 7% interest rate-$7,000
Gross annual cost of funds is now$191,000
This equates to annual savings of $7,000.

The savings are not huge, but this is just a minor point to show that working in credit does not cost you more. It is wise to also note, that overdrafts usually attract overdraft service fees and a lot of bank fees. It would not be uncommon to have $2,000 per annum charged in bank fees on the overdraft example.

On the working in credit model, you basically have $200,000 on deposit in the bank at day one. As you need money you draw from your credit balance. As the "deposit" in your bank reduces, it alerts you to either decrease spending or increase the income.

This is the most significant point. It is the amount of the credit balance, or lack of it, which sends a clear message to our brain that we are spending too much. You could argue that as you approach your maximum overdraft, you get the same signal, but in my opinion, I do not believe the signal is as clear.

Working in credit also puts you in control. Overdraft means "on demand". The bank can demand that you reduce or repay your overdraft at any given time and sometimes they actually do. With a credit balance this does not happen. As long as the interest is being paid, and you have sufficient credit to meet your outgoings, all is well.

Getting back to my client, the most significant and obvious change to me, was that he was a lot happier. All the strain had gone and he was enjoying his farm, his livestock and his family.

I have had clients in trouble tell me how "their bank was doing their head in".

From my own experience, I had a number of loans, and overdrafts with a bank. My bank didn't want to assist me purchase something so I went to a building society which does not have overdrafts. I borrowed enough to run credit balances on all my accounts and my whole financial reality changed. I was happier, in control of my business and no longer beholden to the Bank Manager via his overdraft controls. More than that, I was able to look up my various credit balances and that gave me a snapshot of my businesses at one time. The size of my credit balance is the best Key Performance Indicator (KPI) that I have.

In summary, running your business in credit is not only cheaper in the long run, but it puts you in better control, provides a happier outlook and gives you a snapshot of how it is all going. More than that, you don't need a bank manager or anybody else trying to control you through overdrafts.

Makes sense doesn't it? Working in credit makes a significant difference to how you feel, your stress levels and so on. It also puts you back in control.


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