Smart Banking Guide

Dealing with the Banks – what you Need to Know

Written on July 29, 2008 – 5:52 AM | by dodolovesme

If you discover that you cannot raise all the costs of starting a business by yourself, you may well decide to go to a bank for a loan. These generally take one of three forms:

1 The Overdraft This means that the bank allows you to draw money which isn’t in your account, up to an agreed amount. It sounds an ideal solution for an embryonic business, but there is a catch. The bank charges interest. That means you not only repay the bank the amount you were overdrawn, but you also have to pay them added interest — and the rate can go up. An overdraft is useful for cash-flow problems, and many businesses rely on it for that reason. But you must be aware that the bank does expect to be paid back with interest — and that they get to choose when !

2 The short-term loan This is a loan normally given to you for a period of up to five years. The interest rate is often fixed (so it’s worth timing the loan for a time when the interest rate is forecast to go up rather than down). Short-term loans are often a good way to purchase expensive equipment, stock etc.

The bank will want to be assured that they are going to get their money back so will generally ask for security, i.e. something they can take if you stop repaying them. You might offer them a life assurance policy, if it is worth enough, but many borrowers do end up offering their homes as security. Be aware, though, that this means that if the business goes bust, you will lose your home as well.

3 A medium-term loan works in much the same way as a short-term loan, but it is paid back over a longer period of time.

It has to be stressed that banks are not charitable institutions. They can – and will – call in their debt if they believe that the business isn’t going to be able to pay back. If you have given your house as security on a loan, the bank will have no qualms about repossessing if they decide to call the loan in. For that reason, it is a good idea to be very cautious as to the amount of money you borrow, and to avoid using your home as security if you possibly can.

Having said that, the banks want your business to succeed rather than fail, simply because that way they get to recoup their money, plus interest. For that reason, they are also pretty careful as to who they lend their money to. They will want to see a convincing business plan, to reassure them that you are a reasonable bet. If no bank wants to lend you money, it might be that they can’t recognize genius when they see it – but it is also possible that they sniff a dud. If you are turned down for a loan, find out why before you charge off – and then decide if you can learn anything from their answer.

Banks are very keen to attract prospective small businesses which they believe will succeed. Most offer a package of goodies such as reduced or even free banking for a certain period, so it is worth sounding out the best deal.

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Tags: back, bank, business, home, interest, life, loan, money, security, work