From: Ronald Raygun 
Subject: Re: New Business - Business loan, Overdraft, Personal Loan or to use Equity
Newsgroups: uk.finance
Date: Mon, 24 Oct 2005 11:37:28 GMT

jagemail@gmail.com wrote:

> My question is what is the cheapest money that we can get? Shall we:
> 1)    Get an unsecured loan for £25K each.
> 2)    Draw £25K each against equity in our homes through our mortgage
> lenders.

(2) will undoubtedly be cheaper than (1).

> 3)    Go with banks offer - they have not given us the rate yet.

(3) will undoubtedly be more expensive than (2), perhaps even than (1).

> 4)    Also like to know if we were to go with bank offer - is there a
> problem in having £25K in loan and £25K as overdraft instead of a
> loan of full £50K?

Yes, the problem lies in deciding which is cheaper.  :-)
With an overdraft, you only pay interst on the amount actually borrowed.
If you were to take the whole amount as loan, and not actually spend
it all, it would probably end up sitting in a current account earning
virtually no interest, while you pay loan rate interest on it.  On the
other hand, the overdraft interest rate might be higher than the loan
interest rate, so it rather depends on your projected debt profile.

It might be worth going for £40k each against your mortgages and a
smaller overdraft of £10k.  If the business folds with a business loan
still outstanding, the banks would come after you personally anyway.
This will be one of the conditions of the loan.