3. Set Up The Basics

BANK – Set up the business Bank Account and O/D facilities

Set Up a Bank Account
One of the first things you must do is set up a Bank Account for your Business with one of the major banks. A bank is an institution, which collects funds from the general public, safeguards them and then makes them available back to the owner of those funds when required. It also loans out funds belonging to the owner (at interest) to other parties who are in need of them and can provide security, plus charge a fee for their use.

Basic functions of Banking
The basic functions of banking are:

  1. The collection of funds from the public.
  2. The safeguarding of those funds.
  3. The transfer of those funds from one person to another without their leaving the bank (this is done by means of cheques or automatic transfer through the banking system, or via the Internet etc)
  4. The lending of that money to other parties for a return or reward called interest.

Loans made by a bank are based on the amount of funds held by the bank at any time after taking into account sums that must be held in reserve in case the owners of the funds require them from time to time. The loans are, of course, made with proper security in place in case there is default. A bank is therefore an institution that deals in money, as well as providing other financial services.

They accept deposits of money from customers and they make loans of those funds to generate a profit. This profit is the difference between the interest they receive from the borrowers and the interest they pay to the customers who own the funds.

Dealing with your Bank and it’s Managers
Your bank is a provider of services and because of this, you as the customer, is someone who is very important to them. Remember, without customers the bank cannot exist. Make sure you are not difficult to deal with because even though banks work hard to provide good customer service, one half of the problem is usually the customer’s.

If the service you receive is less than satisfactory, make it known to the bank in a pleasant manner. See if the problem can be rectified. When discussing any problems you are having, make sure you are not demanding and that you are courteous in all your dealings. If you can maintain this type of approach, then many potential problems may be easily defused.

It’s a good idea to make yourself known at the bank, so introduce yourself to the bank manager and some of the people you will be dealing with on a regular basis. As you visit from time to time, say hello to familiar faces, because this makes it easier when you have queries that often arise within your banking transactions.

It may be a good idea to work closely with your senior bank personnel or bank manager, especially regarding finalising a cash budget, which will go into your business plan. The fact is, the more the bank understands what you are doing and where you are going, the more they can help.

Keep up to date with how your bank is going by reading their Annual Report available to you as a customer and if necessary, attend some of the shareholder’s meetings (if you are a shareholder).

Forming a relationship with your Bank
The whole idea of banking and the function of banks revolve around trust. When you give your money to the bank you trust them with its safekeeping. You also trust the bank to lend it out to others. You receive a profit return by way of interest, which is shared between you and the bank. You, therefore, have to have total trust in your bank’s ability to not only protect your money, but to turn it over and make a profit which you receive a part of.

Banks are looked upon as the safest place to keep your money; certainly safer than keeping it in a jam jar or under your mattress. It is also beneficial to you to use the bank because you receive a return on your money. This would not happen if you kept the funds hidden away somewhere in your house.

Banks today describe themselves as “relationship bankers”. For example if you are in business they welcome it if you will keep them informed of your business activates as they wish to support well-managed businesses. They want to form a relationship with you and your business. It is really up to you to present your business to the bank in such a way that you can demonstrate its viability and that it is worth their support.

How to manage your Banking relationship well
Small businesses customers and their banks have 2 major concerns – responsiveness and communication. Banks need to respond quickly to the concerns of their customers and owners should respond openly and candidly to questions from their bank regarding their business and finances.Communication is something that both sides need to keep open at all times because good communication will always be the main ingredient in a good working relationship.

Some helpful suggestions to ensure you get the most out of your relationship with your bank include:

  • Be Comfortable - Make sure you are comfortable with your bank and your bank manager. If the bank only deals with the larger corporate, then change or select a smaller bank at the start of your business.

  • Deal with Senior People - Try to have one senior person that you deal with at all times. It’s easier dealing with a particular official or manager, than general staff when you have an issue with your account or when it’s time to talk about arranging a loan.

  • Banks Point of View - Understand the bank’s point of view. Banks, in general, are very conservative in their approach because they do not like to be seen to be too relaxed with their customer’s money. They are in the business of lending money that does not belong to them and making a profit from those transactions. At all times banks are looking at ways to minimise risk, so initially they may look at your proposition with less interest than what you would expect. Remember that the bank manager sitting across the desk from you was probably once a teller.

    That means that the same “spotty faced” arrogant little kid that used to be behind the counter, hassling you when you tried to cash a check so many years ago, is now the very same person you are asking to borrow $1million from! If that is the case, understand that that “spotty-faced bank teller” had one thing drilled into him/her when he/she was learning the trade – “look after the bank’s cash”. If the cash drawer didn’t balance, - everything broke loose in the office. He/she will have experienced the harrowing times received at the hands of bosses when that happened.

  • No Surprises - Don’t be surprised if the bank manager is a little shell-shocked when you ask for a $1million loan and have little security to offer! Banks have a fiduciary duty to protect their clients’ money and they can only attract more funds for deposits if they keep their customers happy. The grown up bank manager understands that the trauma of the office explosion of the past would be nothing compared to what would happen if they lent $1million out and lost it.

Not Like the “Good Ole Days”

Unfortunately many people today do not believe that banks are customer friendly any more. In the olden days a customer could see a bank manager almost immediately without an appointment, just by turning up at the door. It was possible to talk to one person who acted as your banking adviser, whether it was the bank manager or a senior person within your branch of the bank. Today much of that is gone with many banks closing up branches and centralising operations in order to reduce costs maximise efficiency and increase profits.

Banks, of course, are businesses and like any other business they have to report to shareholders and account for the management of their operation. Many feel that banks are customer friendly only towards the big business from which they receive a major slice of their profit. This may not always be the case. One thing is for sure, and that is the bank must make a profit for its shareholders like any other business.

Electronic Banking– convenient but watch fees
Today, because of rising costs and advancement in technology, most banks, as well as other lending institutions, have come to the conclusion that it costs far more to serve customers over the counter than to arrange for their banking needs by telephone or by computer. The age of the electronic banking is well and truly now dominant around the world and of course it is a profitable operation because the bank charges fees for this type of service.

To be fair to the banks, the average customer can save themselves money anyway by using electronic banking services. There is a lot to be said for the convenience and time saving when customers don’t have to attend a bank to get service for themselves over the counter.

As a customer you need to be fully conversant with the fees charged by your bank for the services you use. There are different types of accounts and different fees apply to the functions within those accounts. The type of account used, how you withdraw those funds, the way you deal with deposits and transfers, all dictate the total fees you will eventually have to pay.

How to choose a Bank for your Business?
Most people feel that the main banks operating in the country are “much of a muchness”. That is, they all provide basically the same services and charge the same fees, so the selection of the bank is not a critical issue.

In “days gone by” it was the bank manager you chose and followed, rather than the bank itself. Today, where it is not always possible to always obtain an appointment with a bank manager, most people select a bank on the basis of how progressive they are and how convenient they are to their home and business location.

Most banks are now very efficient in operations and have well trained staff to look after the various functions in the interest of customers. It is more important to have a bank where you feel you will be able to get personal help when required. They need to demonstrate that they are interested in looking after your needs and that service to you is paramount. Good service is something that should be at the top of the list because you want to have a continuing relationship with people in that bank that you hope will not be transferred or depart, leaving you to start afresh with new staff.

Each bank will have its own policy as to loans, overdrafts and other credit facilities, so you need to check out that aspect before making your choice. One of the best things you can do, of course, is to enquire from other business associates, or companies in the area, about the service they receive from their own bank.

Another important point is convenience. You need to be able to have a bank, which has sufficient branches around the country, accessible to you if you are travelling. This also includes the location of ATM machines. There is nothing worse than being unable to find a machine when you need cash. The beauty now , however, is that most ATM machines are “compatible” and are able to handle credit card withdrawals, or debit card withdrawals from all banks.

There are therefore a number of issues that need to be considered when you are choosing a bank. Of course always remember that if you are not satisfied with the service at a bank, or if you are unhappy with how you are being treated, then there is nothing to stop you from changing.

7 Basic Products your Bank provides
Banks have a range of products available for business customers. Choose the best one for your business.

Some questions to ask include:

  • What are my needs?
  • Which of the bank’s products would best meet these needs?

For example, my need may be for the purchase of assets, in which case I need to structure a particular product that will cater for that. Another need may be basic such as obtaining working capital to see my business over a temporary slump, so my need may be for overdraft facilities or a short-term loan.

Some bank products include the following:

  1. Bank overdraft
  2. Term loans
  3. Leasing
  4. Commercial bills
  5. Trade loans
  6. Letters of Credit
  7. Other Products.

Bank Overdraft
An overdraft is where the bank allows you to overdraw your account. In effect you are taking more out of your bank account than what you have in it. That is, you are allowed to overdraw the money you have saved. It is a form of temporary loan, which has to be repaid. The bank agrees to the limit of the overdraft before you can activate the facility.

An overdraft is also known as a loan, which is “on call”, or “on demand”. This means it has to be repaid as soon as the bank requests repayment. Most overdrafts do not have a fixed expiry date, but it is generally accepted that the overdraft must be cleared within a particular agreed time.

Overdrafts are usually arranged to finance the daily trading operations of the business, so its requirements can fluctuate from time to time. Interest on the overdraft is usually paid monthly by being debited to the bank account and will vary according to the bank rate that is in place at any particular time.

Term Loans
These are loans granted by the bank for a particular term. It can be a short-term loan of 1 to 2 years, or a longer-term loan of 5 to 10 years. Term loans are acquired for a specific purpose, such as the purchase of capital equipment or for the expansion of part of a warehouse, or for replacing office computers, etc. The bank takes collateral by way of security over the business, or over a property. The term loan is for a fixed period and has to be repaid at the end of that period.

Should you tell the Bank everything?
Many business owners do not like telling the bank everything about their business. They may feel the bank can be a friend and ally or a consultant, but not necessarily someone who they will confide in regarding personal and private financial affairs. There is always the question of confidence, which is important in the relationship between your business and the bank. If the bank suspects your business is failing or if the business is not going as well as it should, then they may feel uncomfortable regarding any exposure they have to your business.

Many owners do not inform their bank of the bad things that happen because they don’t want things to get out of hand, unnecessarily. If you do have to see your bank about a situation of concern in the business, determine the cause and come up with potential solutions before meeting with your bank to discuss the issues involved.

6 Basic tips when dealing with Banks

  1. Choose carefully. You don’t always get it right the first time round. It’s best to try two or three banks and practice on them before making the final selection.

  2. Never sign a personal guarantee. If you can avoid it, do not sign a personal guarantee. Banks usually insist on this if you are taking out a major loan. If possible, direct the bank to other security such as the business assets. In addition, never ever allow your spouse to sign a guarantee. Not only will this protect your relationship in the event of anything going wrong, but it is not wise or fair for a spouse to sign a guarantee for a business that the spouse may have little involvement in.

  3. Borrow from different banks. It’s probably a wise move not to borrow from the bank that also holds the mortgage on your home. It is best to keep the business affairs separate from your private affairs, if possible. If the business runs into trouble the bank may want repayment of your whole mortgage as well as the business borrowings, so it is possible you could totally lose your home. Try and keep the two arrangements separate and go to different banks, so that one bank deals with your business and the other bank deals with your home and private affairs.

  4. Never put up your home. Keep your business affairs separate from your family and personal affairs. Do not raise a loan for the business on your home unless there is no other option ( and even then think hard before you do it and be aware of the serious consequences). It’s better, if the business fails and your home and family are protected, than if the business fails and your home and family go down with it. No business is worth putting your family in jeopardy. Secure the loan with the whole business, including assets and stock. Keep the home totally separate.

  5. Watch the assets you declare to the bank. When you are dealing with your bank, they will require you to make out a statement of personal assets and liabilities, as well as your business assets and liabilities, as part of the application. This is because the bank will try and get security on those assets for any moneys they lend to you. Some businesses feel it is unwise to declare all their assets so this is a matter you need to take up with your accountant or other adviser. Bear in mind that the banks will not be very happy if they lend you money and find later on that there were more assets you did not declare and which they could have brought into the security.

  6. Using family and friends. The general advice is that it is a very, very bad move to borrow from your family and friends because if things go sour, it can destroy your good relationships. Sadly, many business owners prefer estranged relationships with family or friends (which can be worked on and hopefully recovered) than dealing with a bank that has no emotions involved in the transaction except to recover their money. It may be better to strain a relationship temporarily, than to go bankrupt because you have borrowed from a bank and the business has run into difficulties. These are issues you have to weigh up at the time and talk over with family and friends as well as your accountant or other financial advisers.

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