Skip to main content

Growing

Seasonal stock: use a term loan for the order and an overdraft for the gap

Term loan or overdraft for seasonal stock? Usually both. How to split one Christmas stock bill between them, and what lenders ask now costs are rising.

Reading time 5 min read
Category Business guides
Written by The bizbritain team
Term loan or overdraft for seasonal stock? For most small retailers the answer is both. A term loan pays for the stock order you have already committed to. An overdraft covers the weeks when the money is out and sales have not caught up. Each does the job the other does badly.
This guide explains what each facility is for, how to split one Christmas stock bill between them, and what a lender will ask this autumn now that costs are rising again.

Section 01

Term loan or overdraft: what each one is for

A term loan is a fixed sum. You get it all at once and repay it in set monthly amounts over an agreed period. That suits a cost you know in advance, such as a stock order with a supplier invoice attached.
An overdraft is a limit on your business current account. You draw on it when you need it and pay interest only on what you use. That suits a gap that moves around from week to week.
Each one has a weak spot. A term loan charges interest on the whole sum, even in the weeks you do not need it. An overdraft is usually repayable on demand and reviewed each year, so it is a poor home for a large, fixed bill.

Section 02

Can I have a business loan and an overdraft at the same time?

Yes. Many businesses run both, and lenders are used to seeing it. What they want is a clear reason for each one.
For seasonal stock the reason is simple. The order is a known cost with a known payback, so it goes on the term loan. The swing in your cash while that stock sells is uncertain, so it goes on the overdraft.
Here is how that looks on one order. The numbers are illustrative, not a quote.

  1. Price the committed order

    Say your Christmas order is £40,000, due to the supplier in October. That is the fixed part. It is the amount you would put on a term loan.

  2. Map the weeks the cash is out

    Rent, wages and VAT still fall due in November while the stock sits on the shelf. Work out the lowest point your account reaches before December sales come in. Say it is £12,000 below zero.

  3. Set the overdraft to the gap, plus a margin

    An overdraft limit of around £15,000 covers that low point with some room to spare. If sales come in early, you simply use less of it.

  4. Repay the loan from the margin, not the float

    Choose a loan term the stock margin can carry. A short term keeps the interest down. A longer one leaves more cash in the business in January, when trade is often quiet.

Put the whole bill on an overdraft and you may hit your limit in the very week a supplier wants paying. Put it all on a term loan and you pay interest on money that sits idle once the stock has sold. Splitting it avoids both.

Section 03

What lenders ask when costs are rising

According to S&P Global's flash UK PMI, published on 23 September, input cost inflation rose for a second month in September. It reached its highest level since June. Firms reported higher energy, fuel and raw material costs.
The same survey found that total new work fell slightly. So costs are going up while orders are soft. A lender reading that will look harder at three things in your application:
  • Your cost assumptions. Use this year's supplier prices, not last year's. A forecast built on old prices is the first thing a credit team will question.
  • Your margin after price rises. Say how much of the higher cost you are passing on to customers. If you are absorbing some of it, show the margin that is left.
  • Your headroom. Show the lowest point in your cash flow forecast and how the overdraft covers it. A plan with some room to spare reads better than one that only just works.
For more on how overdraft use has moved this year, see our story on SME lending and overdraft use in the second quarter.

Section 04

How to apply for both in one go

You do not need to go to one lender for the loan and another for the overdraft. It is usually simpler to ask for both together, with one forecast that shows how they fit.
bizbritain looks at the whole seasonal need and routes it to lenders who fund stock. Through our business growth finance service, we arrange facilities from £25,000 to £10m. Lenders on these facilities usually want at least 12 months of trading history, and two years is preferred for unsecured options.
If stock is not your only gap, our guide to working capital finance options matches each kind of cash gap to the facility built for it.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

Back to business guides

Read the guide · ready to talk?

Got a question the guide didn’t answer? Talk to an advisor.

We’ve arranged growth finance for thousands of British businesses. If you’ve read the guide and you want to see what £25k to £10m from 100+ lenders could do for yours, our advisors are on the phone now.

Business growth loans Email the team