Individuals and small businesses tend to bank with one institution and stay there. The bank chosen might be the one used by parents, or it might be because of perceived convenience, such as having a branch at a university campus. It never occurs to individuals that they may be getting a poor deal or that banks are in business to make a profit. Banks are very clever in that they market their products in a way that creates the illusion that they are doing their customers a favour, whereas they are unveiling their latest money-making schemes.
Examples of such money-making schemes are almost endless, but the type of marketing to look out for is as the following: The large print might suggest that a high rate of interest would be paid on the account, while the small print would tell you about an annual fee. Put the two together and the net result might be a low rate of interest. The account might offer benefits such as discounts on selected products, but the small print will not acknowledge that customers could negotiate many discounts for themselves. The general rule is that if something is advertised in large print in the shop window, there are likely to be catches. What is advertised will almost certainly be truthful, but the good news will be in the large print, while the bad will be found in the ‘conditions’.
Banks do sometimes come up with very reasonable offers, but these are often found by reading leaflets; it is unlikely that such a gem would be advertised in large print, nor are bank staff likely to push such a product. Getting a good deal out of banks takes much research, patience and tenacity.
Researching the bank issue with students reveals some awful cases of what amounts to finance abuse. One foreign student had parents who were well able to support their offspring but they did not want their money to be frittered away; so they discussed with the student how much financial support was needed and it was made clear that the parents would not be best pleased if more than this amount was spent.
The parents transferred the money on the first day of each month, but the bank took up to 10 days to clear the funds. Because of the bank’s negligence, the student was forced to go overdrawn, which resulted in a ‘no authorisation’
penalty. The student visited the bank to agree an overdraft limit, but this was exceeded when the bank charged interest, which triggered further charges for
‘exceeding credit limit’. Within a few months, the account was £250 overdrawn, all of which were interest and penalties. The student did not know how to get out of this downward spiral.
The student was advised to consult the local Yellow Pages and to list on one side of A4 all the banks operating in the area and armed with this make an appointment to see the bank manager. The strategy was to point out to the manager the competition this bank faced, to complain that the overdraft had only been incurred because of the bank’s negligence and to make it clear that their customer had suffered hurt because of it. The advice was to insist that the account be credited with all the charges and interest and a further amount be credited as compensation for the suffering. Failure to agree this, the bank manager was advised, would result in the account being moved elsewhere and fellow students at the university being made aware of the treatment that had been received. In addition, the bank’s claim to recover their money would be rigorously defended if the case went to the court. Faced with this, the bank credited the account with all charges and credited a further £100 as compensation.
The point is that overdrawn accounts can always be closed. If the amount owed to the bank is legitimate, then the strategy is to open an account elsewhere, take out a loan to clear the original debt and move on. If the overdraft has come about because of unreasonable charges (as in the example), then the strategy is to simply move on and leave the overdraft unpaid. In such cases, it is important to pay in full all legitimate charges and write to the bank pointing out why
must be prepared to move from one bank to another. People not being prepared to act because ‘it isn’t worth the hassle of moving for £25’ forget that £25 becomes £35 and so on. Banks adopt what can be described as the ‘children’
strategy’ in that they will ratchet up the charges slowly and surely to find out how much they can get away with. If the bank knows you will not put up with any unnecessary charges, there will be a marker put on your account to make sure it does not happen. It should be the objective of every account holder to have such a marker put on their account.
Now whereas sensible individuals ensure that they have bank accounts that incur no bank charges or fees and receive interest on credit balances, for the business customer it is never that easy. Many believe there is nothing they can do, but it is never the case that nothing can be done.
Like the individual customer, business customers believe that they are in a very vulnerable position if they owe their bank money, but they can also clear any monies due by agreeing a loan with another bank. For many though, it is simply a case of not being bothered. Small business owners seem prepared to spend weeks and weeks chasing potential customers, but they will not reserve a week to visit all the banks in the area. It is a simple matter of preparing a basic business plan and then visiting each bank in turn. Give them a copy of the business plan, explain the business and ask the bank for the best deal that can be offered in the circumstances. Explain that you are looking for a long-term relationship, but you want a good deal and are prepared to visit every bank to see who is prepared to offer it.
To open a business account, it is important that negotiations are confined to large branches in which there are managers of sufficient seniority to be able to make decisions. Otherwise, it will be like the ‘Little Britain’ sketch in which
‘the computer says no’.
There are three important rules to consider when negotiating a business account, but they are only relevant in full if the business is a limited com- pany, rather than a sole trader or partnership. Remember, sole traders and partnerships (but not certain ‘limited partnerships’) have unlimited liability and have no protection if the business fails:
• Never give personal guarantees.
• Have the bank’s ‘on demand’ clause eliminated.
• Agree in advance what the bank can charge for and what those charges will be.
Never give personal guarantees
The bank will often ask that you give them a guarantee that if the business fails, you will make good from your personal finances. This should always be refused because there is no point in having limited liability (your loss in a limited company is limited to the amount you paid for your shares) and then giving it away. Instead, agree that the bank can have a fixed and floating charge over the assets of the company.
Have the bank’s ‘on demand’ clause eliminated
The bank’s standard ‘on demand’ clause is exactly what it says. The bank can demand its money back ‘on demand’ and without notice at any time of its choosing. So the business might have one bad month, the bank manager gets nervous and the bank calls its money in. For obvious reasons, the business can- not pay up immediately, so the bank has the business wound up. Admittedly, this is not very likely but it is certainly possible.
The answer is to insist that the ‘on demand’ clause is deleted. Instead there would be a clause inserted, which stated that the bank would give the business
‘three months’ notice, if it wanted to recover its money. This notice period would allow the directors of the company sufficient time to negotiate alternative facilities.
Of course, there might be legitimate reasons why the bank should be entitled to ask for its money back, on demand, for example, if the owner of the business was acting fraudulently. The answer, in discussion with the bank, is to agree
‘bank covenants’. A covenant is something you agree with the bank that you will do. Examples of covenants might be the following:
• I agree to run my account honestly and advise the bank immediately if I believe I may have financial problems ahead.
• I will ensure that interest cover never falls below 1.25, on a cumulative basis.
• I will ensure that I never make a loss for three consecutive months.
Eliminating the ‘on demand’ clause does mean that there is one less thing to worry about, but the real benefit is that it focuses the mind. Having agreed covenants with the bank, one objective of the owners of a business must be to review the performance of their company against such covenants. For example, if a covenant stated that there would never be three consecutive months making a loss, the combination of making a loss for two consecutive months and the covenant would focus the mind to ensure that the third month was in profit.
Agree the charging structure
A key part of any negotiation with a bank is what they can charge you for and how much they can charge you for what. Failure to negotiate and agreeing a charging structure will result in you signing the bank’s standard contract, which although going to several pages of small print will amount to: ‘we can charge you what we want, when we want, for whatever reason we choose.’
The business section of the press is littered with horror stories related to banks, probably the most famous being the ‘golf jolly’. A company, as part of its marketing effort, organised a golf day. Recipients were invited to participate in a round of golf, where generous prizes were on offer including one for winning, one for ‘a hole in one’, one for the best putting round, etc. After the round, dinner was served with plenty of drinks, all provided free by the company.
To maintain good relations with its bank, the name of the bank manager was added to the invitation list. He accepted the invitation and had a great time.
You can imagine, therefore, the fury inside the company when they received an invoice from the bank for their ‘manager’s time’ and, to add insult to injury, were told that their account had been debited accordingly.
The bank might propose that the amount charged is based on a fixed charge per quarter, or a charge per transaction or a combination of the two. It could be even more complicated with debits carrying a higher charge than credits, for example. The method of charging might be appropriate in the circumstances, but again might not be.
A charity was organised to provide a service, with the objective of utilising all the income it received to get to as many people as possible. One bank offered a set monthly fee to run the account, while another wanted to charge 90 pence per transaction, with the first seven transactions in any 1 month free.
The problem was that although it was a very small charity, its £10 annual subscription per member tended to arrive in the same month, so the bank would
be effectively taking just under 9% commission on each £10 cheque. Clearly, the fixed monthly fee was the better deal in this case, but it was bettered by a third bank who offered free banking for charities.
So the strategy must be to visit all the large branches of the banks in the area and ask for the best deal each will give you. Then, taking into account the circumstances of your own business, work out what each bank is likely to charge over a full year. Pick out the top three and arrange another appointment with each, at which you ask if they can tweak their quotation.
When the bank is selected, ask the bank to draw up a contract setting out what has been agreed. It is recommended that when the contract arrives, it is checked over by the company’s solicitor to make sure that it matches the expectations. Now, all this has taken time and money, but at the end of the day, it is likely to be considered as an investment with a relatively quick payback.