Discuss ways in which the company might reduce the bank overdraft as required by the bank.
Firesafe Ltd. should constantly make efforts to reduce their overdraft as the bank requires them to do so. In the current economic climate banks are being more careful of the money loaned.
Banks are currently trying to convert business overdrafts to loans. “Many business banking overdraft facilities are being removed or refused and others converted to term loans by business banking managers” (http://whichcommercialfinance.co.uk).
This is beneficial for banks but can affect the way in which a business’ finance is managed. For Firesafe Ltd, it can have serious implications. Loans are legally binding, meaning that they have to pay the loan back within the agreed time frame. This affects the business because if they do not pay off the loan, they can build up interest, and potentially threaten the business. This would increase costs and therefore decrease the chances of Firesafe Ltd to break even or make profit, resulting in bankruptcy.
A loan is very different from an overdraft; an overdraft is extremely flexible. A loan is a large fixed sum of money that carries high interest. This means that Firesafe Ltd. would have to change the way it operates and try to increase sales and cut down all unnecessary spending in order to pay back the loan. The main implication of a business overdraft being converted into a loan is that the bank then has control within the firm. For example, Firesafe Ltd. may have to secure the loan with their company as collateral, meaning if they couldn’t pay the loan back, the bank could take over the business.
For Firesafe Ltd to reduce their overdraft, they need to focus on having more funds/capital coming into the business. This could be through debt collecting (selling off debts owed by difficult debtors to debt buying companies) and increasing