These days, picking the right bank is not just a matter of comparing products and facilities. It’s also about choosing the right partner for your business. Stephen Preen offers suggestions on what you need to consider, from start-up to expansion, to get the most from your relationship with your bank.
The relationship between a business and its bank is one of the most vital and enduring. Few businesses operate without some form of banking finance, at least in the early stages, and a good relationship with the bank and its representatives may help the business make it through difficult periods.
This means that finding the right bank and properly assessing its services and products is an important process. While aspects such as the account type and services included with the account, should be carefully considered, perhaps the most important service offered by a bank, especially during start-up and growth phases, is financing.
The different options offered by various banks should be fully reviewed before making a final decision, as it could make a big difference to the bottom line. Business owners will need to look at a number of criteria, such as the amount of finance needed, the term of the loan, and the type of loan available.
As a rule of thumb, long-term assets should be funded by longer-term borrowings, and vice versa. For example, a bank overdraft could be appropriate short-term finance to help with the day-to-day running of a business, such as when an inflow of funds is needed for a short period. However, it shouldn’t be considered for permanent or long-term financing requirements such as purchasing plant or equipment.
For the purchase of major assets such as land, buildings, plant or machinery, long-term finance such as a mortgage or bank loans may be more suitable. These kinds of loans should be used when permanent needs can be defined, such as purchasing plant or machinery, or to finance expansion plans or growth. Raising the money against the actual use is a good practice—for example, using hire purchase or leasing for motor vehicles.
Keep in mind that banks like to have real assets to secure loans but business owners should try to avoid using personal assets for business loans.
Credit cards should not be used as a financing option because of their high interest rates. They should only be used as short-term finance and when they can be fully repaid within the interest-free period.
That’s not to say credit cards don’t come in handy. The records provided by business credit cards can be useful in managing accounts, and businesses also typically use credit cards to gain reward points but this should not be a reason for using such financing.
If they are used, have separate cards for business and personal use, and keep in mind that using a business credit card for personal expenses may raise FBT issues.
Any corporate cards issued to staff should also only be used for business expenses. A credit card policy should be developed to specify who is entitled to a card, what it should be used for, when reconciliation will take place, and who is responsible for any additional charges such as late payment, as well as loyalty points.
Specific Needs
In order to identify what services and products your business needs from its bank, first work out where the business is in its lifecycle. Businesses that are still in the start-up phase usually have very specific needs. They are usually sole traders and it’s likely that they will have minimal banking transactions.
The relationships with the bank itself might be limited, with basic trading facilities such as EFTPOS and BPAY, and a credit card being used. Most business owners will look for a low-cost service with a bank that is located nearby. Many start-up businesses will find electronic banking particularly useful, to save on time and costs in payroll and accounts payable.
In the growth stage, banking needs can change quite dramatically. Such businesses usually have a high number of financial transactions to manage, with employees now handling cash and banking systems, and the ownership may be in multiple hands.
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Growing businesses may find it most effective to have different bank accounts and services from different institutions. For example, the local bank may still provide a basic cheque account, but another bank may offer a more suitable overdraft facility or loan. It’s always worth shopping around to make sure you get the best rate. The banking environment is increasingly competitive.
Business owners could consider moving to a bank that is a specialist in their industry. For example, agriculture requires specialisation and a bank will have the appropriate researchers to use data obtained from the Australian Bureau of Agricultural and Resource Economics (ABARE) and other sources. This data gives them insight into current and future trends affecting commodity markets (for example, beef, dairy, wheat and wool) and so they can assist their clients in their decision-making processes.
The main requirements that such a business should look for in its bank include:
• the ability to service different receipts and payments role, for example providing the best rate for term deposits and competitive quoting for overdraft facilities
• multiple signatories for authorisations
• increasing trading facilities to include cheques and credit cards
• establishing relationships in order to access emergency funding
• overdraft facilities for expansion
For a growing business, strong relationships with its banks are essential. Business owners should meet regularly with the bank manager to monitor the financial situation and investigate any other opportunities. Include the bank in your management plans and, if there are any problems, go to them before they come to you. Short-term cash flow issues can be better managed with the foreknowledge and assistance of a bank with which you have had a good long-term relationship.
To help build a good relationship, ask the bank to help with useful economic data; assist in client presentations if appropriate; invite representatives to your board meetings; and get to know them through other functions and events.
As a business grows, it’s a good idea to re-assess the use of electronic banking to ensure that risk is being managed and sensible safeguards are in place. It may be worth reverting to more ‘old-fashioned’ forms such as paying all invoices by cheques which require two signatories, rather than allowing anyone in the business with access to a computer to make payments. If the business does prefer to use e-banking, develop a control and checking process early on to identify who in the business can access banking details and authorise payments and withdrawals.
Keep in mind that if the bank pays a cheque with forged signatures, it is the bank’s responsibility. And if an e-banking password is used by someone who shouldn’t have known it, that’s your responsibility.
As businesses enter the more mature phase of their lifecycle, banking needs tend to become simpler. In part, this is because cash flow analysis is more accurate and can therefore be planned for. Most purchases can now be financed by the business rather than needing external financing, so future transactions are steady and easy to budget.
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At this time, many businesses may be able to consolidate all their accounts with one banking institution. This will help achieve efficiency of process and simple transactions, although multiple accounts may still be needed.
And for businesses trading overseas, a useful new facility may be a foreign currency facility.
• Stephen Preen is a partner with accountants and business and financial advisers, HLB Mann Judd Sydney.
What the banks say…
It's critical to have a Bank that supports your business with a dedicated banking manager that recognises the value of cash flow, not just bricks and mortar.
—Shane O'Connor, Head of Deposits and Transactional Services, BankWest
Relationships are based on understanding, so ideally, owners s
hould be prepared to share information so that we can thoroughly understand their business and provide exceptional relationship management. At St George, we pride ourselves on our service differential. Our relationship managers work closely with business owners to really understand their business needs and provide the most appropriate financial solutions.
—Anthony Poiner, general manager, Product and Commercial Business, St George
If you're borrowing to buy assets for your business, it's worth considering all options. By matching the life of your loan to the life of the asset, you can pay it off over time with the income it generates.
—Michael Blomfield, Commonwealth Bank Local Business Banking
According to East & Partners research, 60 percent of customers want a relationship manager, but only 23 percent of small business customers actually have one. With our focus on having one business banker or branch manager who deals directly with the customer for all of their needs, we can offer our customers a real understanding of their business and a continuity of relationship.— David Marshall, group executive, Business Financial Services
It’s all about information flow. Typically we find small to medium businesses have two or three big decisions per year regarding their banking needs—such as getting into new markets, buying a new piece of equipment, building a new factory—and the key is for the customer and the banker to discuss this as early as possible. And if there’s a cloud on the horizon, it’s important that the customer discusses that with the bank and they will find in most cases the bank will be supportive if there are no bad surprises.
—Geoff Greer, regional general manager nabbusiness, National Australia Bank
