Banks for Business Finance
High street banks are the primary source of finance for working capital. More sophisticated funding requirements demand careful consideration as to how to choose the most appropriate type of finance, select the right institution, and find out how to approach that institution. You should also consider sources of government and EU grants and assistance.
Banks as Sources of Business Finance Requirements
The bank overdraft is the commonest form of business finance. It is used to provide working capital, funding the difference between the time when your business spends money and when it is paid by customers. The limit the bank is likely to allow you depends primarily on the amount owing to your business at the time and the value of work in progress. An overdraft facility is normally granted for a specific period after which it will be reviewed - although it can be withdrawn if your bank loses confidence in you. Often the least expensive form of finance, it is not suited to financing any project, which is risky or not fully secured.
Your capital investment needs will require stable longer term borrowing. This may vary in its characteristics depending on the length of their term. Short term borrowing is, in practice, little different to an overdraft whilst medium/long term loans allow you to repay the principal amount after a fixed period. The bank's documentation will have more detailed conditions to regulate your business.
A short term loan is usually, like an overdraft facility, for a set period, say, for one year. A medium term loan is one provided for up to five years. A long term loan can extend up to ten years and beyond.
All the major clearing banks (and increasingly building societies) offer a range of borrowing and financial services including overdrafts, term loans, factoring and asset finance on broadly similar terms. It generally makes sense to operate loan facilities at the same bank as your current account.
Your choice of bank will depend on a range of factors, principally whether they will provide the borrowing/loan facilities you require. Whilst personal relationships with the bank manager are critical, as a business customer your choice may also be based on satisfaction with the bank on key issues including interest rates, conditions of the loan, security required for the loan, bank fees and personal guarantees which may be required from you and your fellow directors.
As well as financing local business, high street banks will also have overseas trade finance departments, which deal in providing credit for international trade transactions. This is a competitive area and you should confirm that the bankers you use have experience in your particular business sector and of the conditions in the overseas territory in which you may be dealing, including connections with local branches and banks.