Making the most of your bank

Whether you have been running your own business for years, or just starting out, it is never too late to consider your banking arrangements. By taking a closer look at the services banks offer and choosing the best deal, you could save both time and money.

Banking is changing rapidly, the number of branches is diminishing, and with so many services now delivered electronically, banks are becoming more remote. There is less differentiation between banks and more consolidation. However, in the UK we do still have a wide selection and it is worth looking at the finer details to make sure you are getting the best deal for your business.

Money Transmission

First, money transmission - it is best to shop around for a bank to suit your needs, as you would with any supplier. Most banks will quote you a standard small business tariff, but if your turnover is more than £250K pa, and this applies to most pharmacies, it is usually negotiable. At the end of the day, a commercially minded bank manager will quote competitively to gain a good business customer.

Remember, most banks do not actually want cash as it is expensive to process and provides no return. Some banks, however, do have a need for it, such as Girobank - to pay out pensions etc. - but don't dismiss other contenders as there is more to good banking than cheap cash collection. Try negotiating with your bank manager, sometimes charges can be reduced by changing the way you make deposits, or by paying creditors electronically rather than by cheque.

Interest Rates

In general, interest rates reflect the level of risk the bank is taking, with higher rates for loans that are unsecured or in a sector with a high failure rate. In pharmacy, it has been possible to obtain rates reserved for larger companies because of the guarantee provided by AAH.

If rates are volatile or if borrowing is high, then it may be wise to consider a little interest rate management for the first three or four years by either capping or fixing the rate:

Fixed Rates - as the name suggests, you pay a fixed interest rate for an agreed period after the which the interest reverts to the floating rate. (It can be viewed as insurance for peace of mind, fixing perhaps the biggest business overhead?)
Capped Rates - Like a fixed rate you can 'cap' the maximum rate to be paid, but if interest rates should fall you take advantage of the lower rate. Again, it is worthwhile shopping around for quotes.

Types of Facility

Overdrafts are essential for normal cash flow requirements, but should not be used for buying capital items as there is no repayment discipline - whilst you only pay interest on what you borrow daily, it is repayable on demand and it is not unknown for an overdraft to be called in at short notice, creating cash flow difficulties for the business.In retail pharmacy it is not unreasonable for an overdraft facility to be around 3 percent of the ex-VAT turnover of the business. This will usually cover the normal cash flow cycle of the average pharmacy, but remember that VAT should be reclaimed monthly to aid this.

Loans

Loans can be best utilised if you match the repayment period to the life of the assets purchased. In most cases the loan will be through your bank at a rate of interest linked to the base rate of that bank - this is probably the cheapest and most flexible way to borrow - but certain assets, motor vehicles or equipment may be leased or bought on lease purchase. These alternative methods may suit your business better by not tying up the main banking facilities as in the case of a loan.

Security

Banks require security as a secondary method of repayment, so that in the event of the business failing, they can still obtain repayment for the loan. The assets of the business such as premises, goodwill and stock will be required as security, but additional personal security can sometimes be negotiated out of the equation.

If your borrowing requirement is high, or you are a first time buyer with no track record, personal security will be expected however and failure to provide this may make the bank question your own confidence in the project. The bank will conduct security valuations and usually only lend to these levels, but these will be at a discount to a market valuation as the bank will be looking for a quick sale in case of failure and will instruct the valuer accordingly.

Credit and Debit Cards

Credit and debit cards have been slow to be established in all but the bigger high street pharmacies due to high commission charges. However, charges have dropped substantially and you should be paying no more than 2 percent on credit cards and 20-25 pence per transaction on debit cards. The introduction of credit cards should be considered seriously - customers generally spend more with plastic - it is less painful and can be a useful way to boost OTC turnover.

Relationship Management

At the end of the day banking is still a 'people business' and often the service you receive is down to the relationship you have with your particular bank manager. The relationship needs to be managed as you would any other supplier relationship and should be nurtured through regular communication and personal contact.

Today, managers have less authority than they used to as head office lays down strict guidelines which must be obeyed, so take care to keep your contact informed, particularly if the news is bad. They are more likely to be able to help you remedy the situation if they are kept fully in the picture. In particular:

Be professional
Communicate regularly
Confirm actions from meetings in writing
Supply information on time
Establish a track record of reliability
If putting forward a proposal, telephone or write with a brief outline before the meeting

Remember, cash is king - businesses fail for two main reasons, they either run out of profit, or out of cash. Stay on top of the business by monitoring cash flow against projections to identify problems at an early stage, allowing you to manage them before they become insurmountable.