Choosing a bank
Introduction
This article is based on common sense and experience. Of course, there is no specific common law or statute governing your choosing a bank, however, it is an important decision to make when you need to deal with your money.
How banks operate
Banks are bombarded with heavy criticism by the press much of which is justified. The big UK banks effectively operate a cartel in most areas of business banking. The most important consideration when choosing a business bank is to remember that banks are bureaucratic profit driven organisations, from which you can expect no favours, especially when borrowing. You should expect a similar standard of service as from a major supplier of gas, electricity, or telephony. You should also be just as determined to obtain the best price from the beginning.
Any bank will probably meet your basic expectations. There are many outstandingly helpful individuals in banking, but do not expect them to step outside the bank's own systems.
Two of the principal cartelised features of banks are, firstly, cosy club arrangements by which cheques are cleared between the major banks, and secondly, the subjective reference system and difficulty of transferring money from one account to another.
There are signs of a recent trend back to a "bank manager" who knows something about your business. On a day-to-day basis however, it will usually be the manager's assistant with whom you deal. Unfortunately the banks do not generally allow you to meet and assess this person. Our advice in choosing a business bank can therefore be summarised as:
- Set out your requirements succinctly, and obtain quotations from several banks.
- Do not ignore Internet banks.
- Ask to meet the person who will have day-to-day control of your account, and assess their character.
- Make sure there is a branch reasonably near to you if you need to make payments into your account frequently and are not going to use the Internet. Postal payments take time and may occasionally be lost.
- Assess their website for ease of use because it is most likely that you will be dealing with the site, rather than an individual, in most instances.
| General issues about banks
- If you borrow on your business account from the same bank to which you have mortgaged your house, you may be offered slightly more money or better terms. However, if things go wrong in your business, you will lose your house far faster.
- Your business bank will lend more if you are willing to charge your house, even if you already have a mortgage. The reason is that they assume (rightly) that you will be more careful to look after their money if the roof over your head is at risk.
- An overdraft can be called without notice. That means the bank can insist on repayment without reason and without notice. If you want to borrow without this risk, take out a loan, not an overdraft. Of course, it is unlikely that the business bank will call in your overdraft unless they perceive that you have financial difficulties.
- Most UK business banks will lend £10,000 or more to a known and trusted customer without security. Beyond that, the house or shares go into the pot.
- Beware of banks financial advice. Surveys show it to be of very low quality. They can probably explain well how financial markets and financial instruments work, but avoid advice as to what you should invest in.
- Keep the bank in the know. If you send monthly management accounts in good times and bad, they will have confidence in your ability to run your business and will support you when you need more money to expand.
Now you need to borrow
- The chance of new borrowing because your business is going through a tight spot is remote. Banks do not see this as part of their role. They are not "in the risk business". You are.
- Business banks will usually lend for expansion.
- There are many other sources of money, but few as easy to approach as your business bank.
- Your relationship with your business bank manager is very important to your credibility. If you might want to borrow in two years, the time to start treating your bank manager as a partner is now.
- In considering a loan, your bank will assess:
1. The viability of your project
2. Your competence, integrity and determination
3. Their security in case it all goes 'pear-shaped'
4. How you will pay the interest
5. How you will repay the loan
- You therefore need to produce a good business plan and a cash flow forecast. Of course, it must tie in with your borrowing request. One problem is that if you are sufficiently conservative in your estimates you may find you need more than you are requesting or that the proposition may not look good enough. On the other hand, if you are too optimistic, your cash will be flowing in so fast that you simply do not need the money at all. The only solution is a middle way. If the outcome is very uncertain, you could present the cautious version to the bank, but accompany it by a narrative explaining your more ambitious targets.
- Banks are not interested in imaginative new ideas. The easiest projects to fund are those in tried and tested market sectors where your own proven skills will be put to good use. A solicitor can borrow £20,000 to set up a new practice with bare a blink, but if you want to build a web site to start a new type of search engine, forget it. You will have to look elsewhere.
- Try to set up a meeting to explain your business plan to your bank manager. What is plain to you may not be plain to him. That will also enable you to "read between the lines" and concentrate your energy on areas where you sense misunderstanding or opposition. Above all, practice this presentation - speak it aloud into a mirror. You will be amazed how much better it will sound on the day.
- Really good security helps enormously. If you have assets covering the proposed borrowing several times, and which can be offered as security, you will get your money. Conversely, if you can offer no security, the bank will be cautious and will be more concerned still with other factors.
- The question of repayment is often overlooked by borrowers - but not by the bank. Be cautious. The bank will be no less happy with a proposal wherein the loan is repaid over ten years than one where their money comes back over three years. They make their profit by charging you fees and interest. As long as you are a safe bet for them, they will be happy for you to go on paying them for many years. But if you say the money will be repaid within two years, they will be very worried if it is not. You will be in technical default. From that position you will find it very difficult to extract yourself.
- Loan or overdraft? An overdraft is flexible in that you pay interest only on what you need from time to time. But it is can usually be called without notice. We have never come across a case where a bank has actually called an overdraft with no reason at all, but sometimes the reason is rather thin. If you want to be sure, take out a loan. Your loan will be a fixed sum for a fixed term with fixed repayment dates and many other specific terms. You may pay a higher rate of interest than on an overdraft. Check the terms very carefully and be prepared to negotiate.
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- do not provide a complete or authoritative statement of the law.
- do not constitute legal advice by Net Lawman.
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