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Sir in your lecture for over trading, you have said that taking an overdraft isnt necessarily bad unless its been planned.
Why does it matter wether we plan for it or not if we are having to take an o/dd anyways?Overdrafts are risky because the bank can demand repayment at any time and also because the interest rate can change from day to day (whereas a long-term loan will be at fixed interest).
We don’t have to take an overdraft because we could have taken a long-term loan instead. The company should decide in advance which they think is better for them – with overtrading they have not thought about it and have been forced into an overdraft.
Since the increased working capital is going to be for the long-term, it would be more sensible to have financed it from long-term borrowing.
(and I do make this point in the lecture).
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