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Reducing your banking costs

publication date: Mar 31, 2006
author/source: Andrea Kirkby
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Most banks display a full tariff on their websites, but there are also some useful online comparison services which show a ‘broad brush’ evaluation across a number of different banks.

Banking for small businesses has become a bit more competitive since the Cruickshank review was published in 2000 – perhaps not competitive enough, though, since the Office of Fair Trading has just announced it will be investigating whether banks have honoured the promises they made to change their behaviour.

However, small businesses can help to reduce their banking costs by taking some elementary steps. Too many small businesses seem afraid to shop for their bank as they would for any other service.

The choice is now wider than just the four high street banks, as some new names have entered the marketplace, including some of the former building societies. For instance both Abbey and Alliance & Leicester have small business accounts which are quite competitive. So small businesses should compare at least three banks, perhaps considering internet banking or telephone banking services (which may use bank branches or the post office for cash handling). While obviously one of the ‘big four’ names is likely to be in the mix, some of the other banks are keener to get business from SMEs – which may mean they have better rates – so ensure their names are also included.

Rather than just looking at the tariff, businesses should identify which services they will need to use, and cost out a year’s service. Such items as payroll, whether that’s through cheques or BACS, merchant services enabling the business to take credit cards, and cash handling all have a price depending on the number of transactions and amount of money involved.

Interest rates are also an issue for businesses which may run a monthly surplus. Many accounts are now paying between 2 and 3 percent on credit balances. Some on the other hand pay close to nothing – which could deprive a business of several hundred pounds in interest over a year. However, transferring longer term funds into a higher rate account makes sense. For sole traders, some banks, such as RBS, now allow funds held in business accounts and business savings accounts to be used to ‘offset’ personal mortgages, reducing the total interest paid. This may well be of interest to proprietors with healthy cash flow. Because the rate on business credit is about half the rate that would otherwise be paid on the mortgage, there are some real savings over time. Partnerships may also be able to use such services, but the rules are slightly more stringent.

Bank tariffs

Most banks display a full tariff on their websites, but there are also some useful online comparison services which show a ‘broad brush’ evaluation across a number of different banks. That will help narrow down the competitors to a smaller number of banks which can be approached. Many banks have good offers for start-up businesses, often offering 12 or 18 months of free banking – though check what ‘free’ actually means (it often excludes certain services). Some banks then offer a further 6 months at discounted rates.

This won’t help existing businesses, but some banks are now offering ‘switchers’ benefits too. For instance, Natwest is offering three months free. But check for penalties if, at some later date, you want to switch again.

Most ‘free banking’ offers also have limits on the numbers of transactions or amount of money handled. For instance, Bank of Scotland is free if a minimum £5,000 is kept in the account, but the free banking only covers the issue of 99 cheques a months. Abbey’s ‘free forever’ account allows only 20 cash deposits a month and £3,000 total cash deposits.

Always negotiate

Besides looking around, and besides switching, smaller businesses should definitely consider the bank’s stated tariff as a starting point rather than a final offer. Large companies always negotiate their charges and so if you find a tariff that looks good, but suppose one element is a bit expensive, why not see if the bank is willing to change it? There are also instances of businesses offered different terms by different branches of the same bank, too, which shows why tariff comparisons need to be done in detail.

Business banking is a complex area, with a number of different charges concerned. Although selecting the right deal is crucial, it can also be useful to check that charges have been correctly applied. In many cases, they are not – the wrong interest rate may have been used, and sometimes double charging is applied (eg deducting a loan fee from both the business account and the loan facility).

Businesses which need financing have usually taken a loan from the bank where they keep their current account. But since 2002, banks are no longer allowed to demand that customers open a current account to obtain a loan. Businesses can therefore shop around for financing as well as for their current account. It’s always best to finance with a loan, rather than an overdraft, which is repayable on demand – though NatWest now offers what it calls a ‘committed overdraft’ facility for which it has to give notice if it wants repayment. That might suit businesses which tend to dip into the red only occasionally, rather than needing financing for major investment.

Many small businesses are still getting overcharged for their business banking. But remedy lies at least partly in their own hands. By looking round for a better deal, they’ll be putting the Big Four banks on notice that they want more – and perhaps the banks will take more notice of that than they did of the Cruickshank review.

Changing bank

  • mfBAF/will take you through an easy process to compare banks’ tariffs and special offers in reasonable detail.
  • Follow this up by contacting two or three banks for more information.
  • Negotiate. The worst the bank can say is ‘no’.
  • Your new bank should offer help with switching. If it doesn’t – run!
  • The main thing to watch when switching is automated payments such as rent and payroll. They might not be made – just as bad, they might be made twice. Ensure you keep a close eye on the account during the period when both accounts are running together.
  • Don’t forget to check that charges have been applied properly, and get in touch with the bank if they haven't.