Small and medium sized businesses are the lifeblood of British industry. There are almost five million of them in the UK, accounting for some 60 per cent of the UK’s private sector employees and around £1,500 billion in turnover between them. It’s a truly massive market – and its success is reflected in that of the overall economy. For both of these reasons, the banks do a great deal to attract small businesses to sign up as customers.
Many of the additional services they offer – almost always under the pretext of helping you grow your business – have admirable merit, on face value at least. Royal Bank of Scotland and its subsidiary NatWest offer a service called Mentor Aware, a tool designed to help you manage your risks with regards to employment law and health and safety. Bank of Scotland offers free access to Sage planning software – an established tool widely used by businesses for finances and operations visibility and control. Barclays regularly runs workshops and masterclasses around the country on how you can run your business more efficiently. HSBC claims to know a thing or two about world business and can thus offer specialist advice in your dealings overseas.
However, as with much that is marketed in this day and age, there is a danger that the bells and whistles can mask some serious spluttering under the surface. While designs for growth are certainly admirable and should be supported, that growth must be sustainable. The number one priority has to be keeping the house in order, especially at a time when the economic ground beneath our feet remains, though certainly more stable than it has been in recent years, still somewhat rocky.
Business banking classifications explained
When it comes to business banking, it is up to the individual banks to decide which bracket you fall under and therefore what type of account you qualify for. They usually offer three main types, with your eligibility set by the size of your operation. The type of account you get will determine your service levels and costs.
Business bank accounts: for 'microenterprises' - typically classed as those with up to ten employees and up to £1m in annual turnover.
Commercial bank accounts: for 'small and medium sized enterprises' (SMEs) - generally those with a turnover of up to circa £25m and 250 employees
Corporate banking: For larger businesses and publicly listed companies
The case for specialist business accounts
As discussed in our introduction to business banking guide, as a small business you’re under no obligation from any regulatory perspective operate your business finances through a specialist account. However, the practicalities will deem it necessary for most that exceed the one or two man band bracket. Keeping your incomings and outgoings separate from your personal finances is a must, and by maintaining a business bank account in good order you’ll give yourself the best chance of securing finance in the future – something that may be of critical importance in the future. By having a business account, you’ll also stand to benefit from the Financial Services Authority’s Business Banking Code – a voluntary code of conduct in dealing with commercial customers which all of the major banks adhere to.
Your hand may be forced too. When you move beyond the basics, the banks will insist on your using a specialist business account. It costs them to process your money, so if you’re paying in cash on a regular basis or have a lot of automated payments coming out of the account, they’ll want to recoup their expenses.
Therefore, a business bank account could well be both advisable and unavoidable.
Yet before you begin weighing up the best package as per all the added throw-ins, remember that it’s the bread and butter that matters most: like so much in the running of your business, that’s cost, ease and credit.
Where costs are concerned, after any initial fee-free period, the banks will look to charge you a monthly fee, along with ‘pay per use’ costs for withdrawing and paying in cash, CHAPS and BACS transfers, overdrafts, changing services and pretty much anything else you do with the account. The actual costs differ significantly from bank to bank and therefore should never be taken lightly.
Take this scenario as an example. You run a busy pub and you take an average of £5,000 in cash per week. You’ll face charges of anywhere between 50p and £2 for every £100 you deposit. At the bottom end of the scale, that adds up to £25 per week, £108 per month or £1,300 per year. At the top end, it’s £100 per week, £433 per month, or £5,200 per year. That’s a difference of £3,900, before you take into account any of the other charges you’ll face.
With such disparity in the market, it’s clear that cost should be your primary concern. You also need to check whether the bank will pay you interest when your account is in credit.
After costs, the ease of operating the account should also factor highly in your considerations. When you run a business, you want the bulk of your and your employees’ time to be spent doing what you do best. Manufacturers want to spend their time making things; builders want to spend their time building things; artists want to spend their time smoking cigarettes and drinking coffee. Whatever your primary motivations for setting up shop, they are unlikely to involve spending much time in banking halls.
We live in the age of Internet banking. Let’s face it, we live in the age of Internet everything. The banks will all have fairly mature online systems now to make your life easier. However, the access you are offered in branch and the processes there-in are also important, especially if you’re resolutely ‘digiphobic’ or you deal in cash to any significant degree. In order to spend less of your time in the queue and more time making money, review the bank’s rules on what you can and can’t do at the counter. Points of reference should be your limits on withdrawals and deposits (including change, if you need it); the processes for setting up and amending automated payments; and the use of dedicated fast lanes and machines that allow you to get in and out quicker.
Also check whether the bank will assign you a dedicated business banking advisor who you can call or book appointments with to administer your account. This should mean your queries get dealt with quicker.
Payroll management up to a limited number of employees and other obligatory back office functions might also be on offer – but to reiterate from earlier, make sure anything that’s swaying your head along these lines is definitely something you need and would have to do anyway. Otherwise it’s a false economy.
The final of Know Your Money’s big three concerns in business banking is access to credit. Banks have been coy with lending since the economic downturn and have even cut business overdrafts with a flick of a switch. You should look to put arrangements in place where any cuts to your overdraft or business credit card limits require at least a few months’ notice. If you have an arrangement which is coming to the end of its period (these are usually set at a year) and the bank is not prepared to offer any guarantee beyond that time, it could be time to switch to allegiances to guarantee you don’t suddenly find yourself with substantially less liquidity.
The relationship you hold with your bank will be critical when you look for financing in the form of commercial loans, factoring or asset lending. The bank will usually want to see that you’ve run a steady ship for an extended period of time, with regular income and no defaults. But some offer special access for their existing customers and others have set their stall out to support government initiatives for commercial lending – it is well worth bearing these factors in mind when it comes to reviewing the options on the market.
On the relationship front, SFEDI – the UK Standards Setting Body for Business Support and Business Enterprise – advises that it might be worth choosing a different bank for your business account to the one you use for your personal account. Having your foot in the door with two different institutions broadens your options and could prove critical.
Whether you’re now starting a business and you’re looking for an account, or you already have one and you want to get the best bang for your buck, it is essential to fully review all of the options on the market. Once you’ve covered the key bases of costs, ease of access and financing, you can start looking at the added extras in order to eke out as much as you can from the relationship. Just don’t lose sight of what really matters.
Click here to see a selection of leading business bank accounts with Know Your Money’s comparison tables.
Author: KYM Editor