Banks remain the most common form of external finance for small businesses, the main UK retail banks having 3.1 million small business customers with under £1m, according to the British Bankers’ Association (BBA). Banks also remain a central source for financial information, beating even accountants.
Why do so many small businesses go to a bank?
Familiarity. Most of us will have been operating a personal bank account for some years before setting up in business.
Ease. The main banks are a familiar sight on many high streets. Some 70% of the FSB's (Federation of Small Business) members said that they used one of the four main banks as their principal business account.
Cost. There are a variety of different types of finance available but only the fastest growing will be able to access large sums of venture capital or other equity finance. In comparison, banks can offer relatively accessible debt finance.
Flexibility. As with personal accounts, there is now a bewildering array of options for small business accounts. You can run your account through the local branch system. Alternatively, you may find it easier to run your account by phone or through the internet.
Whatever the reason, the bank is the first stop for most small businesses. Running a business account is vital for most businesses and not just for borrowing money.
You may need to run a business debit or credit card to pay for goods or services. You may wish to take credit card payments for your goods or services, which means that you will need merchant status. Perhaps you want to take advantage of other services on offer, such as insurance, pensions or foreign currency payments if your business is international.
Perhaps you just want a separate account to make your bookkeeping easier.
What is on offer from the bank?
Banks are keen to advise all businesses – including sole traders – to run a business account separate from a personal account. However, many choose not to. Despite having access to a range of extra services and support, charges are likely to be higher than a personal account.
Drawing a cheque on your account will cost 59p for each transaction and paying in a (non-automated) credit will cost 75p if you hold a business account at Barclays and your business turnover is less than £100,000.
However, business accounts do bring a plethora of add-ons not available to personal account holders.
Banks are keen to highlight the benefit of the relationship manager based at the local branch, giving business owners support in their local community.
Also, many of the banks will offer free use of a business account for some period to entice new businesses. For example, HSBC offers up to 18 months’ free business banking to start-ups, and six months’ free business banking for businesses with a projected turnover of less than below £1m if they move to HSBC. NatWest also offers free business banking for 18 months for start-ups.
You could also take advantage of free telephone or internet banking, discounts from certain suppliers or free legal advice. Even if you are operating as a sole trader, you may want to consider a business account for other reasons. Perhaps you will need it in the future if you expand and take on more help or want to borrow to finance expansion.
If you have decided to open a business account, the choice really begins. Think about what you want from the bank. Do you want to be able to pop in and see the bank manager at any time or would you prefer to run the account in your own time by telephone?
Many small businesses prefer to run their account at a local branch for cash handling and banking cheques. And many like being able to see a personal account manager in their local branch.