The bank job
It’s all but indispensable for any start-up – but business banking can be significantly more complex than the personal kind. Nevertheless, get things right from the off, with a good bank, and you could be laughing…
When putting together a checklist of all the services your business will require to function, you should make sure that “banking” comes at or very near the top. Money is the lifeblood of your company (and of course is almost certainly the reason you’re setting up your business in the first place) and ensuring that the blood flows as smoothly as possible will almost certainly mean engaging with a bank or banks in a number of ways. Getting this engagement right from the very beginning will prove invaluable as your business grows – especially in case of financial difficulty or the emergence of a requirement for new capital.
Generally speaking, a bank will serve your business in one of two ways: handling incoming and outgoing money and storing your cash; and lending. These activities are very different and should be approached independently; it might be that your day-to-day operational needs are best fulfilled by one bank, but you turn to another for financing. You need to ensure that you choose the best bank for your business for each of your requirements – and that may mean working with two or even several different institutions. There is often a temptation simply to use the bank with which you have your personal account, but this might not be the best option on the market so do shop around before committing yourself to any particular bank.
Many people, when starting businesses, are surprised to know that business banking does not come free – so accustomed have we become to free personal current accounts. However, banks are of course businesses and need to make money, and business banking charges are all but unavoidable in the long run (while it isn’t legally obligatory to operate a business account, and – depending on your business’ structure – you can use your personal account for most transactions, this makes matters much more complicated in terms of filing accounts and what you save on banking charges you may well end up spending several times over on extra accountancy fees; furthermore, your bank is at any rate almost certainly going to be able contractually to close your personal account if it believes you are using it for the purposes of running a business). In the short run however many banks have introductory offers where charges are not implemented for an initial period, and – especially at the beginning of your business journey – this can be a great benefit. Remember, of course, that you will at some point have to start paying, so don’t automatically assume that, say, an 18-month free period is going to represent a better option than a 12-month variant.
Choosing the right bank isn’t, though, just about going for the cheapest option. You may want to make sure you have a dedicated business banking team, which some banks may not offer; you might have access through one bank to incentives such as discounted insurance, competitive currency exchange rates etc which another, cheaper bank might not be able to provide. You will certainly want to ensure that the right internet and/or telephone banking services are available to you – especially if your business is going to take you abroad with any regularity. As always, as full as possible an understanding of your business’ current and future requirements will stand you in good stead when it comes to getting the deal which is right for you.
One factor contributing to your final decision which has become less of an issue in recent times is the interest rate you are paid on the cash you have deposited with your bank. As rates are at historically low levels at present, and the difference between the commercial rates on offer is extremely small, you shouldn’t prioritise the available rates when choosing a bank: money kept in your account over and above what you require operationally is almost certainly a missed opportunity in that it could be earning more invested elsewhere, including back into your business. (Make sure you consult your accountant on how to maximise the value of the cash you do have; don’t be surprised to find out that the bank, while secure, is hardly the most productive option.)
If having decided upon a bank you then change your mind, don’t worry: changing banks is a relatively pain-free process (especially since your new bank should carry out the otherwise-arduous task of switching over any direct debits you may have set up) at least in terms of the basic account transfer. Remember however that you will need to inform of the change any customers you might have who pay money directly into your account, otherwise your cashflow will suffer a swift and potentially horrendous embolism.
When it comes to borrowing money for your business, of course, it’s a different game altogether. Financing is an extremely competitive industry with a great number of players competing for the ability to lend you money at a profit (although considering the “credit crunch” landscape it may not always feel like that) and whether it’s securing credit cards for you and your staff or getting a loan to invest in the business you should shop around very hard for the best deal (preferably with the help of an expert). While the interest rate you’ll be paying on your debt isn’t necessarily the only criterion for selecting a finance provider it is far and away the most important one, so put the requisite effort into sourcing the best option. This doesn’t necessarily mean a bank, of course – funding can come from a plethora of different sources – although you may find it easier to get favourable terms from institutions with which you already have a relationship, especially if you are already working closely with a business banking team.
Borrowing money has huge ramifications and shouldn’t be entered into lightly; nevertheless, almost every business has to secure financing at one point or another, and it should not prove a complicated process assuming that you satisfy the lender’s criteria. You need to be sure, however, that you are borrowing in the optimal manner in accordance with your business’ needs and strategy, and this should be discussed with your accountant before you approach any organisation for a loan. You should also bear in mind that there are tax implications which should be taken into consideration – sometimes, indeed, taking on debt can actually be the most cost-effective option so again make sure you discuss these issues fully with your accountant.
Entrepreneurs contemplating approaching a bank for financing should bear in mind (not that it is easy to forget) that we are living in financially straitened times and institutions are being much more hesitant in lending to businesses large and small than they were before the financial crisis began. As a result, you need to present as compelling as possible a business case, with as much detail you can provide on when and how you plan to repay the debt. You will also almost certainly have to provide collateral – and this is when things can turn scary for budding business owners, as in the absence of a well-established business with hard assets against which to borrow, you may well be asked to put up some of your personal assets as security. If you are not willing to risk your house, your car or your family heirlooms for the sake of your business, don’t use them as collateral: it’s easy to get carried away dreaming about turning your “small” loan into a huge fortune but even “small” loans need repaying and the bank will certainly come after your collateral if you don’t make the necessary payments.
What banks want
When presenting your case for a loan, it often helps to demonstrate that you’re investing your own capital into the project. Banks are more likely to finance a new business if they can see that its owners have “put skin in the game” and thrown their own money into the ring; after all, those owners are much more likely to work hard to make the business a success than those who haven’t invested their own money and therefore stand to lose nothing tangible if the business goes under.
Banks are also more likely to loan money if they are convinced that the people running the business are competent and responsible, so if you can show evidence of your capability (through showing the success either of previous ventures or of your career thus far) and of your commitment to paying back loans you may have taken on in the past (so for example a good history of unbroken mortgage payments) you are much more likely to get a positive response than someone with a history of unreliability, failures and defaults.
Words: Jamie Liddell
This article was first published in Your Business with James Caan in January 2012.