Gone are the days when business bank accounts were just somewhere to stash your cash ready for writing company cheques. Additional services that were cutting edge extras available for corporations five years ago are today routinely offered to smaller businesses. Until recently, for instance, only companies with sales of over £10 million could use invoice discounting. Today, the bar is dramatically lower at £2 million and even new ventures on a start-up turnover of £250,000 might be considered.
Thanks to the power and transparency of financial planning tools, potential credit risks are becoming easier to spot – and to price. Cash holes can be identified well in advance and short-term loans at punitive rates of interest can be avoided. In fact, to take a small company through the ups and downs of its particular business cycle, banks will now fashion a sophisticated combination of services.
Behind these facilities lies the power of online banking portals, which allow smaller companies to manage their financial affairs in real time. As well as checking their balances, they can pour information from their accounts into the latest projections in their business plans or check a forward exchange rate while negotiating with suppliers on the other side of the world. Many of these online transactions are already being offered on a low-cost basis.
John Brooks is happily stepping into the gap identified by the competition authorities for low-cost banking for smaller companies. As head of business banking at Abbey, he offers permanent free banking to companies that typically write less than 150 cheques a month and pay in fewer than 20 deposits.
He can afford to do it because as a late entrant to the SME market, he has no legacy issues. ‘We are able to build a financial model for the future, rather than allowing the past to shape us.’
He admits it is a ‘pretty basic banking service’, but he has won over 150,000 small companies so far, amounting to a market share of three or four per cent.
Others are not far behind. Switch to Lloyds TSB, for instance, and companies with sales of up to £2 million can bank for free for six months. ‘But if they organise themselves, they can extend free banking forever,’ says Stephen Pegge, the bank’s head of communications for business banking. ‘We have just introduced an electronic business tariff, offering free online transactions.’
Relationships still matter in banking. Choose the wrong facility through missing out on crucial advice and you can end up paying over the odds – or running out of cash.
At Lloyds TSB, where 90 per cent of credit decisions are taken locally, the emphasis is for SMEs to have someone to bounce ideas off. ‘We have sophisticated account information on our systems, identifying where trends might be taking a company,’ says Pegge, ‘so we can ensure we have the right level of facilities in place to anticipate future needs.’
Instead of paying £10 or £50 a month for this kind of relationship, smaller companies now pay an account maintenance charge of £3.00 a month.
At Barclays, targets for managers to sell products like company credit cards have been dropped, so they concentrate on increasing value for customers. ‘It is an approach that is paying dividends for both us and our customers,’ says Brendan Horgan, the bank’s commercial director for medium business banking.
When you are on the move, you can now use text messages to stay on top of your account and check recent transactions, says Lloyds TSB’s Pegge. The bank now offers a daily texting service, which five per cent of its customers have taken up so far, expected to be closer to ten per cent by the end of the year.
If you are out of the country, you can still gain access to your account through international banking portals, such as Barclays’ Business Master Online. As well as making payments and viewing your up-to-the-minute financial position, you can look at live rates and deal directly with the Barclays treasury. ‘Wherever you are, you can have real certainty about what is happening,’ adds Horgan.
The use of cheques is falling by six per cent a year and 60 per cent of payments are already being made online at Barclays. Horgan expects that figure to rise to 80-90 per cent in the next few years. ‘Small business owners shouldn’t have to spend Friday morning writing cheques and checking their accounts. All your bills can be settled in 15 minutes.’
Internationally, more business is being conducted in real time, says Mark Davies, director of international product management at The Royal Bank of Scotland. ‘The network for sending instructions between banks, SWIFT, is moving towards a seamless processing of transfer and orders.
‘Remember,’ he adds, ‘to ask for immediate payment by credit card whenever you can. There are systems in place to accept payment from 25 different countries and the use of cards is going to continue to grow.
Five years ago, international cash pooling was cutting edge for corporate treasurers. Now, it’s bread-and-butter cash management that allows small firms to bring all their balances together in a more centralised, automated structure for all their accounts.
‘At the end of each day or each week, you should have one cash pot,’ says Anna Koritz, head of international cash management products at the Royal Bank of Scotland, against which you can offset any negative balances and earn the best rates on what is left.
Strategies for ‘lumpy’ businesses
Trade cycles can last as long as 250 days, particularly if goods are sitting on a ship. With better information systems, banks understand more fully the ‘lumpy’ nature and general ebbs and flows of business operations, particularly for seasonal services. As a result, smaller companies are able to plug any gaps that would once have been covered by an overdraft or other sources of expensive lending.
‘We knit together products to support customers through a trading cycle,’ says Mark Davies at RBS. ‘We might offer a letter of credit on imports, then provide a loan to cover the period of converting raw materials into finished goods and arrange the invoice discounting when you finally sell the goods.’
Wrap foreign exchange into your online banking and forget about ringing around dealers for rates, says Horgan. ‘So when you talk to your suppliers in China, you can check live rates or look at forward rates while you’re still on the phone.’
Smaller companies can combine foreign exchange with all their online banking at Barclays. Alternatively, if they are looking for the best rates, they can try aggregators like FXAll to compare different quotes online.
Leveraging the balance sheet
To fund buyouts and buy-ins, private equity may mean too much loss of control and loan notes at 13 per cent might be too pricey. As an alternative, people are using receivables (sales already made for which money is not yet received) as a cheaper way of leveraging their balance sheet, with rates of two per cent over base.
‘We provide funding on the basis of trade debts, as well as plant, machinery, stock and inventory,’ says Gerry Hoare, managing director of Enterprise Finance Europe, a subsidiary of the Bank of Ireland. ‘If there is property involved, we link to our parent bank, allowing us leverage on all major assets on the balance sheet. Working together, we avoid square pegs in round holes.’
When Horgan asked his 80,000 middle market customers about extra services, they said they were interested in using the bank on a more advisory basis. So last year, he started drawing on the bank’s own expertise in areas like risk management and marketing, creating a free business club, All About Business, which gives SMEs the chance to access the bank’s own research and know-how. So far, 20,000 companies have joined.
John Brooks at Abbey is also happy to use resources to organise networking events. ‘If a customer wants to meet someone in the local business community, we will set it up,’ he says. ‘It’s almost like speed dating. For us, it’s a good way of reciprocating. Network groups are incredibly strong.’
Tailored to your sector
Are you opening a caravan park? Offering legal advice? Running a hotel? Barclays has qualified specialists in each of these areas. The bank gives its managers 50 hours’ training to take a professional qualification and learn how different sectors of industry really work. ‘It’s a great way to add value,’ says Horgan. ‘We end up with better information and better qualified managers, which means we are able to fine tune credit risks.’
It was a manager in the West Country who spotted the potential in caravan parks and gained a management qualification. ‘We now understand that market and can give more specialised advice,’ says Horgan. ‘People are now coming to us and four more of our bank managers have taken the qualification.’
That’s just one more illustration of the lengths to which banks are now going in order to meet the needs of the medium-sized enterprise sector. It’s a customer group they can no longer afford to ignore.