Business banking: The basics

Now you have formed your limited company you must, by law, open a business bank account. (Sole traders can use their personal account.)

Start by comparing several banks. Look for a local bank with a dedicated small business team, free business banking for at least the first year and access to free consultations with accountants, lawyers etc. Before you sign up, check any fixed charges such as transaction fees or overdraft fees and confirm that credit cards, charge cards, statements etc. are free. Many banks offer charge free periods for start-ups and some follow this with discounting their standard tariff for a period of time. All banks must publish their standard tariffs and must tell you of any other changes before you incur them. Compare interest rates, ease of internet banking and any extras the banks may offer.

Open an account

Set up a meeting to open your account. You must present your Certificate of Incorporation and will also need documentation to comply with money laundering regulations. This will include a passport or drivers licence and recent utility bills. This information will also have to be provided for directors and company secretaries (if you have one). If anyone other that you is to sign, take a list of these people and a sample of their signature. You will be asked what combination of people will sign on the account, for example, cheques may require two signatures.

In addition you will need to present details of your business and details of finance you may already have. The bank will give you an account opening mandate.

The amount of charges will be based on the amount of work passing through your account. Generally the more cheques that pass through your bank account the more you will need to pay. Charging methods differ from bank to bank, so check how closely your chosen bank matches your unique business needs.

You can negotiate better rates than the standard rates and will also save money if you use automated payments. You can be charged monthly or quarterly, you might be charged for each item passing through your account, or charged based on the turnover of your account during the charging period. Charges normally appear on your bank statement two weeks before you have to pay them.

How to get a loan

Getting financial backing if you have no previous business experience can be daunting. Your bank will want to know why you want the money and how it will be repaid. For that you will need a business plan which must cover the details of the proposed business including business assets, key staff and finance. If you have been trading for over a year most banks will want to see your business accounts (profit and loss account, balance sheet). If you have several years of accounts they may ask for these. Most banks will provide lots of information to help you with business plans, such as guides, computer disks and face-to-face help. They do actually want to lend money, but only if they are pretty sure they will get it back and make a profit!

The bank manager will take into consideration the specific business proposal, your experience, knowledge and ability to show that you can successfully manage a business. You must have key facts and figures ready and answer questions openly. What are your assets, will you use personal savings, and how much loan do you want? The more security you are prepared to put towards the loan the more likely it will be accepted and you will get a better rate. Perhaps you want an overdraft facility that you can use as working capital when needed?

Whether you want a loan or an overdraft, or want to consider discounting and asset finance or factoring, banks will only lend according to the ability of the business to pay back the money. An essential first step is to write a good business plan. The aim of the plan it gives your business a sense of direction and convinces others that you are committed to the business. It will also help you identify issues early on and show a clear vision of what you want from the business.

Banks will consider your account record and whether you have borrowed and successfully paid back in the past. A bank manager will also look at the business as a whole, what you want the money for and whether you are in debt. They will also want to find out how reliable you are, if you have done your market research and what your competition is. You might need to provide security (possibly your house).

Some companies leave it too late to ask for banking help. They wait until debts are piling up, when in reality the banks can offer more help sooner rather later. Delaying getting advice simply reduces rescue options. The main banks have publicly adopted a Statement of Principles: Banks and Businesses Working Together which sets out in detail how banks will work closely with business customers when companies hit problems, so do take a look at these.