The good news is that competition for small business accounts is rising and the Big Four - NatWest, Barclays, HSBC and Lloyds TSB - are being challenged by new players, led by Alliance & Leicester, Abbey, Bank of Scotland and Bank of Ireland. According to research by the Federation of Small Businesses (FSB), the Big Four's slice of the pie is down from 83% in 2000 to 70% now.
The bad news? Banks are not fulfilling promises to the Competition Commission to offer free banking or pay at least 2.5% interest on business current accounts - and to publicise these services. Yet more than two-thirds of small firms are unaware of banks' obligations. IAN WYLIE offers useful tips for managing your relationship manager. HAGGLE FOR FREE BANKING
Some banks are now pushing 18 months' worth or even two years' worth of free banking for business customers. 'Many relationship managers have the autonomy to negotiate and grant concessions like free banking,' says Matt Hardman, campaigns manager at the Forum of Private Business. 'You should seek this particularly if you're a start-up, when you have enough on your plate without worrying about the cost of transactions or your overdraft.'
But Lee Tillcock, editor of Business MoneyFacts, warns that the offer of 'free banking' may not always be what it seems. 'Watch out for any transaction restrictions, as well as any direct, not branch-based, transactions. In short, read the small print. Be wary of headline-grabbing credit interest rates, as most small businesses will not keep enough money in their current account to make use of this facility.'
DEMAND GOOD FACE-TO-FACE ADVICE
Many business owners still prefer the old Captain Mainwaring style of banking where their problems can be dealt with locally and decisions made more quickly by frontline staff who have the discretion to deal with almost everything. 'Small businesses want to know they are not just a drop in the ocean,' says Matt Hardman. 'They want to know they have a strong working relationship with their bank manager.'
These days, the person in charge of your account is more likely to be called a relationship manager than a bank manager, but they are worth cultivating all the same. Good relationship managers offer experience and accessibility, reckons Steve Jennings, director of business banking at Alliance & Leicester Commercial Bank. 'You want a relationship manager who has helped businesses to survive and grow during both good economic times and bad economic times.'
The number of customers the relationship manager has to manage is also important, he adds. 'To provide a high level of support to your business, the relationship manager will need enough time to fully understand your business and help you develop further.'
Yet while small business banking ought to be relationship-based, don't let it become personality-based. Don't rely on a one-to-one relationship with a specific individual. Inevitably, bank agendas change and their personnel move on, so you could be in trouble when your adviser gets a transfer.
KEEP YOUR OPTIONS OPEN
Don't put all your banking eggs in one basket. Keep a relationship going with at least one other bank, even if it means simply doing personal and business banking separately. We're not suggesting for one moment that you could play one bank off against the other... but at the very least you'll be able to make informed decisions and it might give you greater flexibility and negotiating power.
DON'T BE SHY
OK, you're no shrinking violet, but if entrepreneurs have one failing, it's that they don't like asking for help. Many are so passionate about their business idea that that they don't think they need input from anybody else. Try it, however, and you might be pleasantly surprised. Your bank manager should be a good sounding board, a patient listener and someone who can recommend other professionals you may be in need of - a good accountant, for example.
Make the most of your bank's internet banking service. It will save both time and money. As your business grows, your cashflow gets more difficult to manage - the money (you hope) will be flowing into your account faster, but it will flow out faster, too. To manage this successfully and have your critical financial information to hand 24/7, online banking is absolutely essential.
MAKE THE MOST OF PERKS
Some banks - NatWest, for example - offer a free £500 overdraft and a business credit card for the first year. A&L throws in free legal and tax advice. But beware costly sweeteners. 'Some banks make short-term offers to attract small businesses,' says Steve Jennings at Alliance & Leicester Commercial Bank. 'However, at the end of the term, businesses can be left on a poor-value product.'
DO YOUR HOMEWORK
When approaching your bank for, say, a loan, ensure that your financial plan clearly sets out your outgoings, expected income and other assumptions. Asking for the right amount is important, as you don't want to find that, six months down the road, you have to come back begging for more. So don't forget additional costs, such as extra overheads as a result of increased production.
You'll also want to demonstrate that you've learned the knack of managing your cashflow and that you have good systems in place for monitoring costs, tracking spending, managing stock, collecting debts and so on.
'Look through the fine print and keep on top of your correspondence,' advises Hardman at the Forum of Private Business. Read your bank statements carefully. Human error can result in incorrect interest calculations or term loan accounts set up inadvertently as more costly overdrafts. You should query anything that looks dodgy.
Keep pushing your bank for better rates and service. One problem facing small businesses is that each time they talk to their bank on any issue, the bank deals with the problem in isolation, rather than looking at the business's banking needs in their entirety. It's your job as business owner to make sure that they do this.
THREATEN TO LEAVE
If you feel you are not getting value from your bank, moving is easier than ever. Your existing bank even has an obligation to help you do so. But before you move, give your current bank one last chance. Explain your business needs, then challenge your existing bank to match what is available elsewhere.
'Many people decide it's time to shop around when they attend networking events and hear other business owners talking about the rewards their bank provides,' says Jennings.
Advises Hardman: 'It takes time and effort to find out what other deals are out there, but banking is such a crucial part of your business that you can't afford not to spend time doing the research.'
You can compare charges and services via comparison websites such as www.businessmoneyfacts.co.uk
IF ALL ELSE FAILS, SWITCH
Match the requirements of your business with a bank account that can meet them. For example, if your business carries out a lot of transactions, you will be better off paying a fixed monthly fee rather than choosing an account that charges you for each individual electronic and paper transaction. Look for cost- savings such as free or low-cost banking, free online banking, lower interest rates on borrowings or a packaged solution that encompasses other business needs, such as debtor financing.
Jim Mayer started his Wolverhampton-based photography business Gingersnaps in 1999. 'I decided to bank with NatWest, as they offered me free banking for the first 18 months,' he says. 'But I soon became disillusioned with the level of service and total lack of interest in my business. I was also unhappy with the excessive charges that were applied to my account as soon as the initial honeymoon period was over.'
Mayer took his business to Alliance & Leicester Commercial Bank. 'Overall, switching banks has saved my business on average £350 a year in bank charges and I have a dedicated business banking manager always on hand to offer support.'
When switching banks, keep a detailed account of all standing orders and direct debits (debtors and creditors), advises Tillcock at Business MoneyFacts, as these are potentially a major headache when wires become crossed. Keep both accounts running for a while.
USE YOUR STRENGTHS
If your business has a strong and regular credit balance, use this as leverage to negotiate reduced charges for banking services. 'Don't be content with what you've got, particularly if you have good credit rating and good cashflow,' says Hardman.
Any business that keeps a strong credit balance should insist on deriving some other concession from the bank, such as a reduction of the rate on another loan it may have. For example, if you run merchant credit-card services through your bank, ask your bank manager to negotiate a lower rate on your behalf.
GET IT IN WRITING
Steer clear of verbal agreements. Always ask for written letters of confirmation. Circumstances and personnel change, and you might need proof of the terms and conditions you agreed.
USE YOUR OVERDRAFT CAREFULLY...
It can be tempting for small firms to use overdrafts to fund capital expenditure, but these have a nasty habit of never being repaid. Try to keep such expenditure off your current account by using cheaper term loans, which have a defined repayment schedule. If you have an overdraft you cannot pay off, convert it into a term loan instead.
... NEGOTIATE INCREASES IN ADVANCE
If you have an overdraft, make sure it's large enough. Too many small businesses underestimate their needs, then breach them and end up paying a surcharge. Yes, the scale of the charges may be unfair, but you wouldn't be paying them if you managed your banking better.
Treat your bank like any other supplier. Put your banking services out to tender on a regular basis - every 12 months at least, recommends Jennings - in the same way you would any other service. In some senses, your bank is just a shop that sells money. If you're not getting the service you expect, be prepared to confront it or change supplier.
CLAIM BACK CHARGES
Research by the FSB shows that nearly a third of small businesses believe they've been charged incorrectly in the past year, and a fifth of those who have suffered erroneous penalties say they don't know why they were charged. Says Marc Gander of Consumer Action Group: 'It costs the bank maybe £2 to bounce a cheque or warn that you're exceeding your overdraft, not the 2,000% mark-up they often charge.'
Emboldened by the consumer revolt over bank charge, by which consumers have claimed back thousands of pounds from banks in recent months, small businesses have also started to fight back. According to Gander, small businesses don't have the benefit of the Unfair Terms in Consumer Contracts Regulations 1999, but common law provides similar cover and, in practice, it just involves a slight difference in wording when writing to the banks.
After the outbreak of foot-and-mouth disease in 2001, Alan Abrahams and his partner Valerie Knight-Gibbons struggled for four years to keep their hotel business going on the North Yorks Moors. Earlier this year, they successfully claimed back £25,000 in overdraft charges from NatWest. 'My advice to other small businesses in a similar position is to claim, claim, claim,' says Abrahams. 'It's your money, and there's a good chance it's being unlawfully taken from your account.'
The Office of Fair Trading is taking the banks to try to prove unauthorised charges are unfair. The banks can shelve complaints until the ruling has been made, but Gander and Abrahams argue that since the OFT action relates only to consumer bank charges, small businesses should be allowed to continue their claims.
For advice on how to reclaim your business bank charges and to download template letters, visit www.consumeractiongroup.co.uk.