Bank Loans and Overdrafts (GCSE)

A bank overdraft is a limit on borrowing on a bank current account. With an overdraft the amount of borrowing may vary on a daily basis.

A bank loan is a fixed amount for a fixed term with regular fixed repayments. The interest on a loan tends to be lower than an overdraft.

Example of a loan:

A business borrows £12,000 from a bank over 3 years at an interest rate of 5%. The approximate repayments on this loan would be £392 a month for 36 months (£14,112).

A fixed term means how many months or years before the loan has to be repaid in full.

Normally a fixed term loan will be for a greater amount than an overdraft.

Debentures

A debenture is a long term loan which is usually secured against a specific asset (e.g. the factory) or the overall assets of a business. A debenture is repayable at a fixed date and has a fixed rate of interest.

Debentures are different from ordinary shares because:

The lender has no voting rights in the company.

The loan attracts interests – whereas holders of ordinary shares get dividends.

The providers of loans are paid out before ordinary shareholders in the event that the business fails (assuming there is some cash left).