To help starter businesses, and those unhappy with their bank, the Forum has just produced its own Check Book*, which guides the reader through the right questions to ask. When surveyed, members of the Forum replied that their greatest concerns were charges for transactions, cost of borrowing, the risk of an overdraft being terminated, collateral required for loans, the availability of credit, competence of the branch manager and the speed of service.
All of the larger banks were compared by the Forum in each of these areas. The result of this survey was tabulated in a publication, laid out to imitate a cheque book, in a way that allows businesses to choose a bank for itself based upon the factors that are the most important to them. While ease of cash handling is important for many retailers, a new manufacturing business may be more concerned in being reassured that it will have co-operation in handling a volatile cash flow.
"Businesses working with an overdraft are bound to have a better relationship with a bank, but overdrafts are often used for capital funding, which is not what they are intended for," says James Redman, research officer with the Forum. "But these businesses are in a position to talk to their bank about different forms of funding, including loans, overdrafts, leasing, discounting and factoring. Companies here have usually not looked around enough. If you can get better somewhere else than your existing bank, then go to your bank and tell them."
While overdrafts are a flexible way of borrowing in the short term, they are highly inappropriate as a long-term borrowing method. There are likely to be arrangement fees, a higher rate of interest payable, and the risk of foreclosure by the bank. It is sensible to spend time looking around for better alternatives.
Discounting and factoring are too often ignored by smaller businesses. Each allows a business to, in effect, borrow against its debtors. Where discounting allows a business to receive early payment, before the company chases up its own debts, factoring outsources the credit collection function as well. Consequently, factoring costs more than discounting, but is a more comprehensive service.
The Factors and Discounters Association says that new-start businesses will not normally be able to arrange factoring or discounting until they are at least a year old, and have a turnover of over pounds 50,000. The exceptions to this are management buy-outs, or other businesses which already have a full order book.
Many banks as well as specialist finance houses offer factoring and discounting facilities, but, again, it is sensible to compare charges between a range of service providers. Factors and discounters will advance around 80 per cent of the debt, shortly after issue of invoice. The cost of borrowing is comparable to that of overdraft rates, and, like an overdraft, there is an administration fee. The cost for taking responsibility for debt collection and credit management can vary between half a per cent and 3 per cent of turnover, according to the number of customers and their risk factor and payment history.
Although the use of factors or discounters was once seen as an indicator of a financial crisis for a company, this is no longer the case. A recent survey confirmed that attitudes have changed, and that the vast majority of directors do not perceive factoring and discounting negatively.
But most new start businesses will be dependent on their bank for financial support. A survey published earlier this month by accountants Pannell Kerr Forster together with the Federation of Small Businesses found that small firms are reliant on banks, not least because the profits they generate are too small for them to become self-financing. Proprietors are vulnerable, with most of the borrowings personally guaranteed.
Less than half of the small firms surveyed had long-term loans with their banks, but three quarters had overdrafts. The cost of these arrangements had risen in recent years, found the survey, as banks increased their margins.
While most businesses were paying less than 3.25 per cent above base rate for loans, some were paying an astonishingly high 12 per cent over base rate, and one in nine small firms were paying 8 per cent over base or more.
Steven Bruck, a partner at Pannell Kerr Forster, says that the result of the survey underlines the point that small firms need to re-examine the way they finance their operations. "It is disturbing that so many small businesses do not appear to be benefiting from lower interest rates, and remain vulnerable to the inherent insecurities of the personal guarantee of borrowings," says Mr Bruck.
Stephen Alambritis, spokesman for the Federation of Small Businesses, adds: "Looking for finance should be like shopping for anything. Go to all the larger banks, shop around, and collect information from all of them. Then look at the second and third division banks. Then negotiate with the better ones. If you negotiate well, your bank manager will respect you more."
* 'The Check Book' is available for pounds 5, or pounds 3 for members, from the Forum of Private Businesses at Ruskin Chambers, Drury Lane, Knutsford, Cheshire, WA16 6HA.
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