15/10/2012

15/10/2012

What You Should Know About BANKING

1. Banking advice

To maintain a good relationship with your bank manager ensure you understand; - How the bank assesses loans to businesses - What information is key to the bank - How you can improve your credit rating

2. Bank facilities 1 - Overdraft What is it? - Linked to a current account so that its use exactly reflects the expenditure of a business - Repayable on demand - Interest rate is variable and fluctuates in line with general market rates What should it be used for? - Seasonal or temporary working capital requirements 3. Bank facilities 2 - Term Loan/Loan What is it? - Usually negotiated for a fixed period e.g. 5 years - Repayments are structured - Interest rates can be fixed or variable What should it be used for? - To buy assets such as plant and machinery, technology and fittings - Can be used in the short-term 4. Bank facilities 3 - Lease (or Asset Finance) What is it? - A form of rental - Equipment is chosen by the lessee who will be responsible for the suitability and condition of the asset chosen - Lessor retains ownership of the asset - Lessee makes regular agreed payments to the lessor - Typically for periods of 3 to 5 years What should it be used for? - Moveable plant and equipment 5. Bank facilities 4 - Invoice Finance What is it? - Allows a business to convert debtors to cash - Provides working capital finance, secured against the company’s book debts - Allows a client to access up to 80% of monies owed on approved invoices What should it be used for? - When there is a need for additional working capital 6. Bank facilities 5 - Business Credit Card What is it? - Specifically designed for businesses to assist in the efficient management of business expenses - Can have as many cardholders as necessary on one account - Accepted worldwide - Currently an annual fee on the card as well as a government duty What should it be used for? - Business expenses e.g. travel, petrol, toll charges, client entertainment, etc. 7. Bank facilities 6 - Commercial Mortgage What is it? - Provides long-term finance of up to 15 years for property related purposes - Term can be between 7 and 15 years - Interest rates can be fixed or variable - Specific asset being financed would in general be taken as security for the duration of the loan. Additional security may be required depending on a credit assessment What should it be used for? - To purchase a fixed asset 8. Bank facilities 7 - Hire Purchase What is it? - A method of funding assets which is similar to leasing but has the following differences: o At the end of the agreement you fully own the equipment o VAT no longer applies to hire purchase charges o VAT can be reclaimed in a lump sum by producing the hire purchase agreement - Regular fixed amount are repaid over an agreed period; o Usually at a fixed interest rate o Failure to meet repayments usually results in repossession of the asset What should it be used for? - For purchase of plant/machinery without the initial capital outlay 9. When applying for credit a bank will look for 1) Evidence that you are planning for your business e.g. cash flow projections or brief action plan 2) Up-to-date financials and management accounts with up up-to-date information on debtors and creditors, stock, work in progress, etc. 3) Tax clearance certificate 4) Proof of contracts, copies of invoices and letters from customers – back up to order book 5) Business and personal bank statements (only if your account is held with another financial institution) 10. Banks risk rating system Basel II is an international standard that requires financial institutions to hold enough cash reserves so as to cover their risks. In accordance with Basel, banks use a risk rating system to assess credit applications from business customers. The result of your risk rating will affect your bank’s willingness to lend, the interest rate applicable and the conditions of the loan. It is worth nothing that: - All customer risk rating levels are updated on an ongoing basis based on new loan applications, the operation of the existing account and new/annual information e.g. financial statements. - If your individual credit rating weakens over time it can result in tighter control of your account and a reduction in the availability of credit. - As a business owner it is your responsibility to manage your accounts and stay close to your bank, in order to better inform them of the performance of your business. 11. Bank interest rates Your bank will assess the level of risk in the application and determine the cost of the loan/facility based on the risk. Different rates are available with different finance options, so ensure that you are using the correct type of solution for your business; otherwise you could be paying higher interest rates than necessary.