Business Banking Guide
There has rarely been a better time to set up a business, with historically low interest rates and a growing entrepreneurial culture in the UK. But even if you have been inspired by The Apprentice or the Dragon’s Den to pursue a business idea, don’t overlook the need to attend to the basics when establishing your business.
For starters, you will need to set up a business account, if you're starting up as a limited company, partnership or any other key business structure, such as club or charity. Sole traders can choose whether to use their own personal account or open a business account.
Choosing the right business bank account is as tricky as picking the right current account for your personal use. What is offered to any particular business may be restricted by customer type, minimum balance requirements or business turnover. But there are plenty of options out there and the market is considerably more competitive that it used to be, so be sure to shop around.
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Providers
Most high street banks either offer business bank accounts or have a commercial /corporate banking division. Abbey, Alliance & Leicester, Bank of Ireland, Bank of Scotland, Barclays, Clydesdale, Co-op, HSBC, Lloyds TSB, Natwest, Royal Bank of Scotland, Ulster Bank and Yorkshire Bank all offer business bank accounts.
Facilities
Some facilities offered by business accounts are similar to those offered by personal accounts: most include a chequebook, cash card, overdraft facilities, direct debits, standing orders, interest paid when the account is in credit and interest charged when the balance is overdrawn.Extras offered by some banks include business planner/manager software or a dedicated account transfer or management team. Depending on the account chosen, it may be operated by telephone, post, the internet or in-branch.
So here are some of the things to consider when choosing an account:
- Does the bank have a business banking team?
- Will you have a designated business manager to deal with?
- Are call centre staff or business managers based in the UK or overseas?
- Is there telephone and/or internet banking?
Charges
Unlike personal accounts, most business accounts have charges for day-to-day transactions such as paying in cheques or for standing order and direct debit payments. Others charge a monthly or quarterly fee for the account. Alternatively, charges may be based on the amount of money passing through an account over a given period, namely the company’s turnover.
It is worth looking at the details of each bank’s offering as some will offer free banking to new customers – either account switchers or start-ups - for a period of time, or only start charging after a certain number of cheques have been paid in or payments made.
Although a bank will publish its standard tariffs for businesses, it is always worth negotiating to try and get a better deal.
In general, however, it is worth remembering that banks charge more for accounts where more cheques are transferre. Automated payments, such as over the internet, are generally cheaper, as well as often being more convenient. Internet banking also allows you to view direct debit payments and offers telephone support in case of problems.
A key point to consider is how much it will cost you to have a business bank account. You may have a large number of monthly transactions to process, for example, so ensure you know exactly what charges will be levied on your account before signing up.
Questions you should ask your bank before committing to an account include:
- What fixed charges does the bank levy on business accounts?
- Are there per transaction charges?
- Is there a fee-free period for new customers?
- What do you get for your money (e.g. credit cards, charge cards, free statements)?
- Are there any “hidden” charges – i.e. for sending out letters, returned direct debits, bounced cheques etc?
- Can you get a business overdraft facility straight away and at what interest rate? Or a business credit card?
- What rate of interest will you get when in credit?
- What rate of interest will you be charged when you are overdrawn?
Opening an account
Once you have compared several banks, you will need to provide various documents in order to open your account.Depending on how you are starting up your company (or if you are transferring from another business account), you may also need to provide a business plan and details of your business.
Things you might need to open an account include:
- Certificate of Incorporation (Limited Companies)
- Proof of identity and home address (passport, driver’s licence, utilities bills etc)
- List of signatories who can sign company cheques
- Mandate to open the account (provided by the bank)
Borrowing
If you need to borrow money to get your business off the ground, there are several options open to you. The main ones are:
- Overdrafts
- Bank loans
- Government grants
- Venture capital investment
Overdrafts
An overdraft effectively lets you run your business bank account in the red. As with personal bank accounts, overdrafts can be both authorised and unauthorised. Charges and interest rates vary from provider to provider, but charges for an unauthorised overdraft can be as high as £30 per day. Another potential downside is that banks have the right to demand that overdrafts are repaid at short notice.
Bank loans
Most banks will offer bank loans to new and established businesses that can prove they will be able to repay the debt. Repayment terms can be anything from 12 months to 25 years with interest rates and repayments fixed or variable for the duration. Some loans come with arrangement fees and/or require security for the loan (this means it will be secured on your home or business premises). To get a business loan you will normally have to have written a detailed business plan which shows the business’s cash flows and the bank will make a judgement as to whether future predicted profits and cash flows are likely to materialise.
Government grants Businesses without security or new businesses may also benefit from the Small Firms Loan Guarantee Scheme, whereby the Government intervenes to act as a guarantee in case the business defaults on a loan repayment.
Venture Capital
Another way of financing a business is through venture capital, which involves selling a stake in the business to an investor in return for an upfront cash sum. The investor then has a direct interest in the future of the business, taking a slice of the profits, and selling their stake for profit at a later date.It will be for the business to persuade the investor (or firm of venture capitalists) that the investment is a sound one, with strong growth and profit potential.
The business will also need to consider how much equity it will be willing to part with, bearing in mind that this is linked to the control of the future direction of the business.Depending on the nature of the business in question, the return to the investor may also be more than a simple financial one. It could involve the part-ownership of a product, future products or intellectual property.
For this reason, venture capital as a method of financing is not necessarily suited to every business, and it is advisable to speak to an expert, such as an accountant or solicitor, before committing to anything.
Invoice factoring and debtor finance
Invoice financing or debtor finance is a way of making money available quickly as soon as a piece of business has been completed, thereby improving your cashflow.
Essentially, it involves outsourcing responsibility for invoices to an established lender. The lender (or ‘factor’) loans your business a set percentage of an invoice's value upfront, and then proceeds to collect the full payments on your behalf.
Benefits of factoring
There are a number of benefits to factoring, but the most obvious is that it increases your cash flow by giving you access to funds almost immediately - within 24 hours, as opposed to the 60 days or longer that it could take to receive payment from the client directly.
This release of working capital is particularly useful for companies which are growing, and although there seems to be a perception that factoring is only for established companies, there is a growing number of factoring companies which will consider extending their services to recent new start-ups.
Factoring may therefore be a viable alternative to a bank overdraft, and may be easier to arrange. Factors will be less concerned than banks with evidence of a firm's financial track record, as all lending is linked directly to sales. Another benefit is that there is no ultimate limit to the amount that can be borrowed, as it will always be a percentage of the work completed.
In some cases, it may be possible to raise as much as 100 per cent of a transaction. Generally, however, the initial sum given by the factor will be worth around 80 per cent of the value of the invoice, with the remainder being paid when the money owing is paid to the factor. Factors will usually be open to agreeing an approach with individual customers, and can therefore save a business a lot of the time and stress of collecting payments. A factor can also help with conducting business overseas and in different languages, and a business may also benefit from observing its factor's expertise in the area of credit management.
Downside of factoring
Factoring companies make their money by charging interest on all transactions. Typical charges on the amount loaned upfront will probably be between 1.5 and 3 per cent above the Bank of England base rate. There will also be a charge for the service of handling the sales account, and this will be linked to annual turnover, as well as the volume of invoices that are processed.
Factoring may not be suitable for all businesses, particularly if they rely heavily on a personal relationship with clients. The factor will be able to impose its own credit limits on the business's customers, and will have its own approach to the collection of outstanding debts, which companies may not appreciate.
If reluctant to relinquish its relationship with customers, a business may therefore prefer ‘invoice discounting’ rather than factoring. Here, the lender's role will only be a financial one, and the company will still have to collect its own debts and then repay the factor.
Starting a business and writing a business plan
Starting a business is something that requires very careful preparation and realistic expectations. The first thing to do is to take some time to read the multitude of advice that is published on the subject. It will point out some useful success stories, outlining the factors that led to that success, as well as some common pitfalls.V
In order to access business finance, you will need a business plan. A typical business plan will be between 15 and 20 pages long, and will be broken into relevant sections including:
- An executive summary - an overview of the business, which takes the form of a synopsis of key points from the rest of the plan. Many lenders and investors make judgments about your business based on this section of the plan alone, so it should make concise and compelling reading.
- A short description of the business opportunity - who you are, what you plan to sell or offer, why, and to whom.
- Your marketing and sales strategy - why you think people will buy what you want to sell and how you plan to sell it to them. It should also include details of the market place, your target customers and any competitors. This will give a sense of how much demand there is for the product or service you intend to sell. By all means be ambitious, but be realistic too.
- Your management team and personnel - your credentials and the people you plan to recruit to work with you in order to make the business a success. This section should also detail the salaries you plan to pay.
- Your operations - your premises, location, production facilities, management information systems, stock control and IT.
- Financial forecasts - this section will look at how much capital you need, the security you can offer lenders, how you plan to repay any debts, sources of revenue and income, sales, and profit and loss forecasts.
Last edited July 2007
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