Business finance - Getting the best deal from your bank

When applying for business finance through a bank there are a number of useful tips that you may want to consider to get the best deal from your bank. In the current economic climate where banks are a bit more risk averse and entrepreneurs often may op for alternative business finance its important that you know your way around the financing landscape.

New business owners often turn to the bank that holds their personal account when finding funding, but you should compare charges from at least four banks (for example, how much does it cost for cheques, deposits, standing orders and overdraft facilities). If you’re already trading, changing banks is now much easier than it used to be and it could save you money. For more advice, read our guide to

Many banks offer free business banking for a set period, but find out what charges apply after the introductory period. Ask what ‘free banking’ means – it may be free only if you’re in credit or your turnover is under a certain figure.

When choosing a bank ask these questions:
 What support is offered? – Do they have a dedicated small business team, will you be allocated a specific adviser and is there support material, such as free websites and guides?
 What services do they offer? – For example, do they offer internet or telephone banking? If so, do they charge for this?
 How are charges levied? – Is there a fee per transaction or a one-off charge?
 How close is it to your premises? – If you’re likely to have a lot of transactions requiring you to visit the bank, then proximity is a key issue.

How to keep banking costs down
 Negotiate with your bank manager – Everything is negotiable, from overdraft interest rates and charges to loan repayment schedules. Get any special terms in writing
 Reduce transactions – Try to avoid cash and cheques. Automation – direct debits, standing orders, internet banking – tends to be cheaper
 Review charges regularly – Ask your bank manager to suggest how to reduce charges  Earn interest – If you have extra funds, put them in a high-interest deposit account.

 Make sure the charges are correct – Check any discrepancies between statements  Avoid unauthorised overdrafts – Telephone and internet banking can help you keep track of your account, to see approaching problems What to do if the bank says ‘no’One in 10 business loans applications are rejected. If this happens, find out why, so you can then revise your plan and try again.

There is also non-bank capital available. The South African Investors Network has a list of institutions that help fund businesses. Usually funding depends on the owners being from certain communities, age brackets or geographical locations, as well of course the viability of the business idea.

SA Banks see the small business market as key

I was pleasantly surprised to see the article on the PRMinds website this morning, commenting on a recent report from on the South African banking sector analysis. Where entrepreneurs and small businesses has had to play second fiddle for years in the past due to the perceived higher risk, the recent economic slow down has really turned the tables and we now find that small firms may become the preferred market. Small business need start-up and growth funding and together with business investors, the banks play a key role here

The report states that 'We believe that the future of the South African banking sector lies in personal banking and the small and medium-sized business loans. The banks, in particular, should focus more on expansion of their operations in the domestic economy in coming years. In view of boom in Internet accessibility and mobile phone penetration, telephone and Internet banking has emerged as another key area for growth.' This will be great news for thousands of entrepreneurs and small business owners.

The report went further to say that 'The banks in the country continue lending despite economic slowdown in the world. The bank loans and advances grew at a CAGR of about 17.8% during 2002-2008. The demand for credit by the corporate sector picked up considerably in an attempt to expand production capacity and increase inventories to meet the growing household demand. Moreover, the demand for credit by the corporate sector has also been picking up in the recent years—despite the growing use by companies of non-bank sources of credit such as corporate bonds and commercial paper—driven by fixed investment and infrastructure spending.

This shows that there are still plenty of cash available for the small business sector, and a signal of intent by the banks to back the economy by boosting small business.

Getting business finance from the bank

A large number of start-up businesses call on their bank to borrow money. If you're reading this blog then you may be one of them or certainly may be planning to be. Banks offer long-term finance in the form of loans and mortgages, and short-term finance through authorised overdrafts. But before you approach your bank, you should first work out why you need the money and for how long.

For long-term purchases – new machinery or premises, for example – then a loan or commercial mortgage may be best. Leasing or hire is another option if it’s equipment you need.

Short-term day-to-day running costs (such as buying stock, or tiding you over until cash comes in from a customer) are often best met by authorised overdrafts or short-term loans. When looking at these options, obtain written quotations for each, so you can accurately compare total costs, including bank charges.

Loans
If you need the money for more than a year, for a specific purchase or planned expenditure, a loan is a good solution. You agree to pay back a set amount each month over a specified period.
For long-term borrowing they’re often cheaper than overdrafts – usually around 2.5 per centover base rate (an overdraft can go as high as Seventy per cent of small businesses call on their bank to borrow money.

Banks offer long-term finance in the form of loans and mortgages, and short-term finance through authorised overdrafts. But before you approach your bank, you should first work out why you need the money and for how long. For long-term purchases – new machinery or premises, for example – then a loan or commercial mortgage may be best.

Leasing
Leasing or hire is another option if it’s equipment you need Short-term day-to-day running costs (such as buying stock, or tiding you over until cash comes in from a customer) are often best met by authorised overdrafts or short-term loans.

When looking at these options, obtain written quotations for each, so you can accurately compare total costs, including bank charges.

Loans
If you need the money for more than a year, for a specific purchase or planned expenditure, a loan is a good solution. You agree to pay back a set amount each month over a specified period.
For long-term borrowing they’re often cheaper than overdrafts – usually around 2.5 per cent over base rate (an overdraft can go as high as

What you should be aware of:

The bank can call in an overdraft at any time

You may still have to provide security

If borrowing to fund a long-term purchase, an overdraft will probably cost more than a loan

If you exceed your overdraft limit, you could pay high interest rates and penalty charges and your cheques could be bounced

Overdrafts have to be regularly reviewed


Costs involved
Whether you choose a loan or an overdraft the amount you pay back depends on the interest rate charged, the amount you have borrowed, any fees or repayments. The interest rate will be fixed or variable. With a fixed rate, the interest remains constant throughout your repayment period. With a variable rate of interest, the interest fluctuates with changes to the Bank of England base rate.

Repayment schedules
It may take from one to 15 years to repay your laon. The longer the payback period the more interest you’ll end up paying. When comparing different loans and overdrafts, look at the annual percentage rate (APR). This is the rate it will cost annually once all charges are accounted for. Check the small print for hidden costs. For example, if you want to pay the loan off early, are there penalty charges? Do you need payment protection insurance?

What the bank looks for
The banks we speak to say that banks look at three key areas when deciding to say yes or no to a loan or overdraft request.
Most commonly, they will look at the business and the business plan. In adition, the person asking for finance, the impression they make and their record as a business or personal customer. Then the proposition: will the investment generate sufficient cashflow to repay? This becomes more crucial the bigger the deal is in relation to the size of business and the amount of experience the prospective borrower has.

These are some of the issues you need to take into concidderation when approaching the bank for finance, most of which we cover at our business planning workshops, held regularly accross the country. Visit our website for details or fill one of our contact forms in and we will be in touch.