Banking Finance

Banks are usually the first point of contact for small businesses in need of finance; the process of taking your business plan to the bank manager has changed little despite the growth of other types of finance.

You need to pick the right kind of account for your business; as each account will have different rates, terms, costs and offers. You should take into account the other finance offered by the bank as part of a whole package; as the best account may not have the best overdraft facilities etc.

We recommend HSBC small business accounts, as they have a good set of terms plus a great introductory offer.

There are two main types of finance offered by banks, bank loans and account overdrafts. Banks also offer credit card finance, which is covered in the next section; however, you may find that you get a better deal (e.g.: Lower interest rates / higher limits) if you take a loan and credit card from the same bank.
 

Most banks offer loans to new and existing businesses; these are usually arranged after you have demonstrated to the bank that your business plan is viable, and may also require you to secure the loan on your house.

Bank loans can be from one thousand to several hundred thousand pounds, depending on the business, the quality of the plan/proposal, and the amount of security available. If you are opening a small local shop you wouldn’t expect to get a £300,000 loan!

Payment periods range from a year to over 20 years. The exact details will vary from lender to lender, and each may have several different loans tailored to different businesses’ needs.

The cost of a bank loan will vary depending on the lender, the amount borrowed, and the risk/security involved for the bank. You will usually have to pay an arrangement fee upfront when the loan starts.

If you do not have enough security available, the lender may be able to get extra security through the Small Firms Loan Guarantee scheme; which is covered further on in this article.

Are Bank Loans a Good Idea?

Bank loans are considered an extremely reliable form of finance, as you will know what you owe and the repayments are fixed (unless you choose a loan with variable interest rate). Bear in mind that you pay interest on the full amount of the loan, so if you do not need all of it you are technically paying more than you need to.

If you cannot afford to repay the loan, your house or other security will be under threat; but finance in large amounts is impossible to find without risk.

Bank loans are generally reasonable in cost; they are rarely cheap, but are usually much better value than credit cards or overdrafts.

Overdrafts

An overdraft is a form of temporary finance whereby you are able to go overdrawn in your bank account. You are then charged interest on the amount you go over by, as well as (usually) a regular fee for the facility.

Overdrafts are useful if you regularly have money coming in and out of your account for orders; to ensure that you have the cashflow to pay your bills even if some of your invoices are paid late.

However, overdrafts are not designed to be permanent; and if you are constantly using yours you may need to look at your finances.

Are Overdrafts a Good Idea?

An overdraft is flexible, and helps to maintain cashflow; which is vital part of any business.

You only pay interest on the amount of the overdraft that you are using, so it costs very little to keep available as backup cashflow.

Interest rates on overdrafts are relatively high, so they can be quite costly if you are using them regularly.

Find out more about Banking and Overdraft Finance in our article here.