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Sources of finance - the bank overdraft rip-off

Thursday, May 28, 2009
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We got a letter from the Bank of Scotland last week offering us a very generous bank overdraft for the tutor2u business…

Not that we asked for an overdraft.  We’ve had a positive cash balance since day one and I can’t really imagine why we would need a bank overdraft now as part of our financial structure.

Still it was nice to get the offer…until I looked at the rate of interest on offer.

A quick reminder.  The Bank of England base rate is 0.5%.

The Bank of Scotland offer for a bank overdraft?  Go overdrawn by up to £50,000, on which the interest rate will be 17.5%

That’s 17 percentage points higher than the base rate - for a low-risk, profitable business that has never been in debt.  How generous.

It seems we are not alone.  The media feature lots of small businesses that are complaining that the fall in the base interest rate has not been followed by a reduction in the overdraft and loan rates charged by the banks.  The chart below illustrates that.  So much for the banks wanting to do their bit to help corporate Britain pull us out of recession




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