Defaqto

Providers

Most high street banks either offer business bank accounts or have a commercial /corporate banking division. Abbey, Alliance & Leicester, Bank of Ireland, Bank of Scotland, Barclays, Clydesdale, Co-op, HSBC, Lloyds TSB, Natwest, Royal Bank of Scotland, Ulster Bank and Yorkshire Bank all offer business bank accounts.

Facilities

Most business bank accounts will offer a chequebook, cash card, overdraft facilities, direct debits, standing orders and interest on credit balances.

Here are some of the things to consider when choosing an account:

• does the bank have a business banking team?
• will you have a designated business manager to deal with?
• are call centre staff or business managers based in the UK or overseas?
• is there telephone and/or internet banking?
• What rate of interest will it pay on credit balances?
• How much will you be charged for business loans/overdrafts

Charges

Unlike personal accounts, some business accounts charge for day-to-day transactions such as writing and depositing cheques, standing orders and direct debit payments. Others charge a monthly or quarterly fee for the account.

Some offer free banking to new customers –  account switchers and new businesses - for an introductory period, or only charge after a certain number of transactions.

Although a bank will publish its standard tariffs for businesses, it is always worth negotiating with the manager to get a better deal. 

Generally, banks charge more for heavy cheque usage so electronic payments via BACS are generally cheaper, as well as being more secure.

Questions to ask include:

• What fixed charges does the bank levy on the account?
•  Are there per transaction charges?
•  Is there a fee-free period for new customers?
•  What else comes with the account (credit cards, charge cards, free statements)?
•  What other charges are there? – ie. for returned direct debits, bounced cheques etc?
•  Can I get a business overdraft facility straightaway and at what  rate?
• What rate of interest will I get when in credit?
• What rate of interest will apply to overdrafts?

Opening an account

Anti-money laundering regulations will require you to provide various documents in order to open your account. Depending on how you are starting up your company (or if you are transferring from another bank), you may also need to provide a business plan and details of your business operations.

Documents you may need to open an account include:

• certificate of Incorporation (Limited Companies)
• proof of identity and home address (passport, driver’s licence, utilities bills etc)
• list of signatories who can sign company cheques
•  mandate to open the account (provided by the bank)

Borrowing

If you need to borrow money to get your business off the ground, there are several options open to you. The main ones are:

• overdrafts
• bank loans
• government grants
• venture capital investment
• business angels and archangels

Overdrafts

As with personal bank accounts, overdrafts can be both authorised or unauthorised. Charges and interest rates vary from bank to bank, but charges for an unauthorised overdraft item can be as high as £30 per day and banks have the right to demand that overdrafts are repaid at short notice.

Bank loans

Business loans can be negotiated with your bank manager just like any other borrowing facility and the terms will reflect your creditworthiness.

New businesses may benefit from the Small Firms Loan Guarantee Scheme, whereby the Government acts as guarantor in case the business defaults on a loan repayment.

Venture Capital

Another way of financing a business is through venture capital, which involves selling a stake in the business to an investor in return for an upfront cash sum.

The investor has a direct interest in the future of the business, taking a slice of the profits, and selling their stake for profit at a later date.

You will  need to consider how much equity you are willing to part with, bearing in mind that the investors will have some say in the future direction of your business. The return to the investor may also be more than purely financial as it could involve the part ownership of a product or intellectual property.

Invoice factoring and debtor finance

Invoice financing or debtor finance is a way of making money available quickly, as soon as business is transacted, thereby improving your cashflow.

This involves you outsourcing responsibility for invoices to an established lender. The lender (or ‘factor’) loans your business a set percentage of an invoice's value upfront, and then proceeds to collect full payment on your behalf.

Benefits of factoring

There are a number of benefits to factoring, the most obvious being that it increases your cash flow by giving you access to funds almost immediately - within 24 hours, as opposed to the 60 days or longer that it could take to receive payment from the client directly.

This release of working capital is particularly useful for rapidly growing companies, and although there seems to be a perception that factoring is only for established companies, there is an increasing number of factoring companies which will consider working for recent start-ups.

Factoring may, therefore, be a viable alternative to a bank overdraft, and may be easier to arrange. Factors will be less concerned than banks with evidence of a firm's financial track record, as all lending is linked directly to sales.

Another benefit is that there is no ultimate limit to the amount that can be borrowed, as it will always be a percentage of the business completed.

In some cases, it may be possible to raise as much as 100 per cent of a transaction. Generally, however, the initial sum given by the factor will be worth around 80 per cent of the value of the invoice, with the remainder being paid when the balance is paid to the factor.

As well as ensuring cash flows, a factoring service will spare your accounts department the hassle of chasing money from slow paying customers UK and overseas customers, as well as providing valuable expertise in the area of credit management.

Downside of factoring

Factoring companies make their money by charging interest on all transactions. Typical charges on the amount loaned upfront will be between 1.5 and 3 per cent above Bank of England base rate.

There will also be a charge for handling the sales account which will be linked to annual turnover, as well as the volume of invoices that are processed.

Factoring is not suitable for all businesses, particularly where the business relies heavily on a personal relationship with its clients. The factor will be able to impose its own credit limits on your customers, and will have its own approach to the collection of outstanding debts which you may not want.

If reluctant to relinquish your relationship with your customers, a business may therefore prefer ‘invoice discounting’ rather than factoring. This involves the lender's role being purely financial. Your company will still have to collect its own debts and repay the factor.