Choosing a Banking Provider - there are a range of number of major high street banks offering small business banking in the UK. Most of these provide very similar small business services and so it can appear difficult to choose the most appropriate account for you to set up an account with. All limited liability companies need to open a business bank account in order to establish credibility and trade with suppliers and customers. Sole traders will normally have to use their own personal bank accounts or more likely set up an additional personal account, such as 'Fred Blogs trading as Acme Ltd'. All businesses need to receive monies, pay bills, and borrow money, in order to process cash flows in and out of the business. Banks charge for a range of services including overdrafts, direct debits, standing orders, cheque books, and visa transactions. Over time, these banking charges can add up to a significant business expense and therefore choosing from a range of small business bank accounts during the business formation stage is important.
Most small business banking come with a special introductory offer of one year to 18 months, where charges are discounted, in order to in sign up new business start-ups. There are many online information portals that will allow you to compare the costs, features and services of all the various small business banking options in the UK market. The banks themselves have a range of account information on their websites, regarding features of the accounts of how to apply. It is tempting to apply to your own existing personal bank - never assume they will necessarily have best offers. What they will have though, is an intimate knowledge of your financial history, (which may be of great benefit in deciding whether or not to approve your application). Since the collapse of Northern Rock, the part nationalisation of the RBS and recapitalisation of the banking system, savers and businesses are now aware that banks can actually collapse. Choosing a 'major' UK high street bank, should provide a safer bet than smaller, niche start-up banks, (that may be more vulnerable to collapse due to the financial crisis).
Opening a Bank Account - once you have decided which bank to choose, the process of opening one of the many types of business bank accounts available is a relatively straightforward process. The initial meeting with a small business bank manager will usually revolve around discussing the nature of your planned or existing business, reviewing your business plan and discussing any issues that will impact financial banking requirements and business finance needs in the future. For instance, most small businesses require capital in order to finance a business plan, in the form of a small business loan or overdraft facility.
For new business start-ups, to comply with the various money laundering regulations, banks will demand various forms of identification and documents to establish the authenticity of a limited company or a sole trader. These may include as a minimum, company headed notepaper, details of any Share Certificates, a Memorandum and Articles of Association, Certificate of Incorporation (applies to limited liability companies) and a passport, driving licence and other utility bills (to undertake a credit check and identity check). The process may take around a week to process all the paperwork so that a new business bank account can be opened with a new account number, cheque book, debit card, welcome pack etc.
Banking Facilities and Services - most small business bank accounts offer telephone banking and online Internet banking as standard. These services will enable you to:-
- Move money between business accounts and personal accounts
- Pay bills to suppliers
- Check whether invoices have been paid by customers
- Apply for a small business loan
- Apply for a business credit card
- Set up direct debits and standing orders
- Undertake international foreign currency exchange
- Process large one off BACS transactions
- Download paper basedbank statements the purposes of business and tax accounting.
Types of Bank Charges - there are various types of banking charges that will apply. Essentially the more individual transactions that flow through the business, the higher charges are likely to be. There maybe different account options to choose from, depending upon the most frequently used transaction types. For instance, lower cost accounts tend to be online based, as opposed to accounts where businesses using a large number of regular cash transactions (such as retail based business). It is important to go through the small print on the application form in order to understand what the unauthorised overdraft charges would be, what are the regular fixed monthly fees? is there an introductory rate for business start-ups? and what is the cost of the each cheque written and each direct debit processed? Finding the answer to these questions may appear dull, boring and relatively minor issues, in the context of creating a successful business -yet the overall impact on future cashflow and expense may prove more important than first appears.
The Importance of an Overdraft Facility - many small businesses rely on overdraft facilities as a critical way of alleviating cash flow issues in their day-to-day business operations. Without such facilities or the sudden withdrawal of an overdraft facility by the bank, many small businesses may fail or be forced to use debt factoring, or even enter administration. The impact of the credit crunch is the changing the behaviour of banks and their attitude towards extending credit to potentially riskier small businesses. Therefore, it is vital that an overdraft facility is put in place when the account is set up so that future negotiations can be less painful. Remember banks are also commercial operations that need to make a profit. The UK banking industry is only made up o a few major players, (compared to the American market), and so they have immense negotiating power. The liquidity crisis has forced bank charges upwards for small businesses, as banks defend their own cash flow funding operations.
Types of Interest Rates - despite the potentially large sums of money flowing in and out of some business bank accounts, the interest rate offered for most current accounts for business bank accounts is very small. The traditional use of the interbank rate is not reflected in interest rates offered on cash balances remaining in business bank accounts. The account is not designed as a savings mechanism - it is there to help small businesses manage the movement of cash flow in and out of their enterprises. Therefore, it is important to balance potentially high banking charges with low interest rates on savings, to establish whether a business bank account is appropriate to your needs or not.
Advice and Guidance - most banks offer a dedicated small business banking team with advisers in most local branches. The option to use a dedicated named business manager is usually a chargeable feature of business bank accounts. However, business managers can prove invaluable in a range of practical situations; where large transactions need to be chased through the system, bridging loans need approval, an overdraft extended and so on. They will be incentivised to help you ensure banking services are provided more smoothly. Without an adviser, entrepreneurs will be left to negotiate and explain the situation to a stranger in a call centre, who may not have first-hand knowledge of the company and its history. In these remote call centre types situations, the evaluation criteria used will be solely based around a 'tick box' of lending criteria and will not incorporate human factors such as first hand local knowledge of the risk.
Switching Existing Bank Accounts - the main reasons for switching business bank accounts is to obtain a a higher overdraft limit at a lower rate, get a business loan, receive better customer service or obtain additional business services. However, once a small business has been established for a longer period of time, it becomes more and more difficult and tedious to switch banks due to the volume of administration and communications required to achieve it. For instance, it would be necessary to speak with business suppliers and customers to make sure cash-flow is not disrupted. They may already have electronic payment means set up with the small business. In addition, business expenses paid by direct debits and standing orders will have to be cancelled and re-instated in the new business bank account. Lastly, the whole process of applying for a new small business bank account will have to be undertaken all over again. The banking industry has improved the administrative process through 'Business Banking Code' which has clear guidelines as to what account holders can expect during the switching process.