Cash or loan?

Oedo

Hi folks,
We're in the middle of planning a refitting of our premises. The refit will give us a lot more capacity and facilities to progress our business. It's not just an aesthetic remodelling, it will effectively triple our capacity to conduct business. With the refit I'm hoping 2016 will be a game changing year for us.

After having priced materials and labour we're estimating the cost of the refit at around 10k-12k.

We currently have around 18k in cash (the most we've ever had). It's been very normal over the past couple of years (the business is a couple of years old) to only have around 5-6k in cash. Thankfully we've never had the need to get a business loan and the business to date has gotten by without even an overdraft. We have minimal overheads, recurring revenue coming in, and generally enough work comes through the door to keep everything ticking over.

We're in two minds whether to use our cash reserves for the refit or to get a loan. I like the idea of the business being able to grow by itself and not have to depend on loans and the like, it also keeps our spending in check and I believe this approach will really pay off once we get over these hurdles.

On the other hand a loan will give us a lot more breathing room and if we have a bad couple of months we won't be too tight with a decent cash reserve.

Welcome your thoughts.

Nody

You're claiming tripling your capacity yet on the other hand you're stating "in general we have enough work to tick us over". That to me would question the point of tripling your capacity as you appear to have trouble to use existing capacity as is and you're not even ticking around all months as is. In essence you're investing 12k in the hope that it will be "game changing" yet you don't have a plan how to get the additional work for the capacity you have today or the additional tripled capacity from your investment which is cart before horse kind of approach. Sort out how you're going to get the additional work through the door and then worry about the capacity expansion (and do a cash flow analysis on it, with that additional work how much additional capital will be tied up in the business before you get paid etc.).

jimmii

Overdraft sounds like it would be a good suit then. That would allow you to use your cash to fund it but have that safety net in case it runs over budget or you have some quiet months but it also means if things run to budget and things continue going well then you won't be dipping into dept.

drunkmonkey

Banks have a scheme at the moment where you can get cheap loan if it's for business purposes, I just got one at 4%. It's called an SBCI loan, approval was in 24hrs, didn't need to submit accounts or anything this time, really simple process and a lot of things fall in under it as long as it's business related, doing up premises, changing vehicle ; ) etc.

Oedo

Nody wrote: »

You're claiming tripling your capacity yet on the other hand you're stating "in general we have enough work to tick us over". That to me would question the point of tripling your capacity as you appear to have trouble to use existing capacity as is and you're not even ticking around all months as is. In essence you're investing 12k in the hope that it will be "game changing" yet you don't have a plan how to get the additional work for the capacity you have today or the additional tripled capacity from your investment which is cart before horse kind of approach. Sort out how you're going to get the additional work through the door and then worry about the capacity expansion (and do a cash flow analysis on it, with that additional work how much additional capital will be tied up in the business before you get paid etc.).

Thanks for the reply. Good point, but we have definite plans on how we'll be increasing trade once we have the larger capacity. For one we haven't done a single bit of advertising to date, partly because of our restrictive capacity. The higher capacity will allow us to push the business out more but also expand our range of services we can offer.

Overdraft sounds like it would be a good suit then. That would allow you to use your cash to fund it but have that safety net in case it runs over budget or you have some quiet months but it also means if things run to budget and things continue going well then you won't be dipping into dept.

This does make a lot of sense alright thanks

Banks have a scheme at the moment where you can get cheap loan if it's for business purposes, I just got one at 4%. It's called an SBCI loan, approval was in 24hrs, didn't need to submit accounts or anything this time, really simple process and a lot of things fall in under it as long as it's business related, doing up premises, changing vehicle ; ) etc.

Thanks for that. We feel we'd have a good chance of getting the loan if we were to apply as it's for a very particular purpose that will add to the potential of the business.

jimmii

They will probably suggest an alternative when we applied for an overdraft they suggested a working capital loan obviously best to check it out yourself see how it compares overdrafts can have some painful interest but then again you may never need it.

Oedo

Anyone happen to know what the chances of getting a grant for this kind of thing would be?

Thanks

VincePP

You can get the cheaper loans via the SBCI scheme or as jimmi says go for an overdraft - normally this is not the cheapest way, but as you have cash earning no interest then the buffer of an overdraft that you can dip into if needed is good.

With a loan you are paying interest immediately on full amount. With overdraft, whilst interest rate is higher, you only pay interest if you are overdrawn and just on the amount overdrawn.


So for your situation an overdaraft facility to fall back on is probably the best.

Unless you are in some specialist sector, I don't think there's any grant available

drunkmonkey

A credit line would be a lot cheaper than an overdraft, should ask the bank about it, think you need to have a positive balance in the account for a day every 30 days though, may be able to work it in your favour with cash flow. Bit of a manual process don't think you can do it online.

jimmii

drunkmonkey wrote: »

A credit line would be a lot cheaper than an overdraft, should ask the bank about it, think you need to have a positive balance in the account for a day every 30 days though, may be able to work it in your favour with cash flow. Bit of a manual process don't think you can do it online.

This is what we got and with AIB its set up as an account on your online banking so easy to manage.

drunkmonkey

jimmii wrote: »

This is what we got and with AIB its set up as an account on your online banking so easy to manage.

Yea that's what I was on about, I have it but didn't need to use it and let it lapse the last time so had to apply again, they said I wouldn't be able to transfer online though, would need to go into branch.

jimmii

drunkmonkey wrote: »

Yea that's what I was on about, I have it but didn't need to use it and let it lapse the last time so had to apply again, they said I wouldn't be able to transfer online though, would need to go into branch.

Maybe something they just added in the last year or so possibly. No way would I have gone for it if you needed to go into branch to make transfers!

antoinolachtnai

If your bank manager knows what he is doing he won't give you an overdraft to do capital works. It might suit you, but it doesn't really suit the bank.

Be sure you have thoroughly considered all the costs of ramping up your sales and marketing to benefit from the increased capacity.

You really need to work out a cash flow for a year or two taking all this into account. Then see if you can fund it yourself or if you need to go to the bank. I'd be surprised if you could triple your business with the amount of cash you have on hand. It is great to be frugal but building a business costs a lot of money.