Which type of bank is best for small business?

How to choose from the Big Four or alternative banks

Banks that offer business accounts in the UK can generally be split into three categories, each of which we’ll be investigating in this article.

The ‘Big four’

Who are they?

Barclays, HSBC, Lloyds TSB and NatWest. These four banks hold over 80% of small business accounts.

What do they offer?

They will offer the full range of products. Bank transactions can be made either at your local branch, over the telephone or via the internet.

Where they distinguish themselves from other banks is the support that they offer their small business customers. Every customer is assigned a ‘relationship manager’. Usually based in the local branch, this person will be experienced in dealing with small businesses and will offer support and advice on general business issues as well as banking matters.

The banks often have a library of information on different industries and markets, which could be invaluable as you set up your business.

Banking with one of the ‘Big four’ will open up a range of funding options. From loans to leasing, your relationship manager will suggest which funding will suit you – and having built up a track record with the bank, you may be able to get favourable rates.

The bank may provide seminars or educational literature on various aspects of running your business. They often provide bookkeeping software (profit and loss accounts, cashflow forecasts) or sample business plans. And if you’re online, they all have a website offering information and services to customers.

Drawbacks

The ‘Big four’ have received a lot of criticism recently for their bank charges. When compared to smaller banks, they seem to charge for everything from paying in a cheque to making a direct debit payment. And they don’t pay interest on their business accounts either, no matter how much you are in credit.

You may also feel uncomfortable with accepting advice from a bank manager who is clearly not an independent advisor. But it is worth remembering, that, although a bank manager will be keen to recommend the bank’s own products, it is not in their interest to give advice that will harm their client’s business.

Who are they suited to?

Despite the criticisms, the fact is that most small businesses bank with one of the ‘Big four’, if for no other reason than convenience. Despite the emergence of internet and telephone banking, many people feel happier having a local branch as well, where they can pay in money and talk, face-to-face, with their manager. If you run a shop or restaurant, having a local branch will be invaluable since you’ll be making regular deposits.

These banks also have a wealth of information and experience, which could come in very useful as you are starting up, as well as the full package of funding options.

So if you need these services, it is probably best to bite the bullet with banking charges. Try to see them as a business cost, in the same way as electricity and the rent, and make efforts to reduce them.

Other high-street banks

Who are they?

National banks with less high-street presence than the ‘Big four’, such as the Bank of Scotland. Also former building societies, the Alliance and Leicester and Abbey National.

What do they offer?

Since these banks have fewer branches than the main clearing banks, they tend to offer a less relationship-focused service. Although customers can make transactions at a branch, they are encouraged to manage the account by telephone or over the internet.

Bucking the trend of their larger counterparts, these banks have lower or flat rate charges and offer interest on their current business accounts. If you need finance, these banks often provide overdraft or loan facilities, although the range of funding options may not be as wide as the larger banks’ offering.

Drawbacks

They have fewer high-street branches than the “Big four”, which will be a drawback if you need to make regular transactions over the counter. You will not generally be assigned a manager, although advice may be available from business managers at selected branches or by phoning a central business centre.

Also, if they offer free banking, remember to read the small print. It is sometimes limited to a certain number of transactions per month, in which case it’s worth working out if you’re likely to exceed their limit and how much it will cost you.

Who are they suited to?

If you are looking for a bank with a high street presence, but you’re not interested in a very close relationship or hands-on advice from your bank manager, then this option could be for you. They don’t have the resources of the larger banks, but the cost benefits of interest on your account and low charges are certainly worth investigating.

Smaller banks

Who are they?

The Cooperative Bank, Fleming Premier, Cater Allen

What do they offer?

These banks offer a direct business banking service. Most transactions are made electronically or by post and you manage your account by telephone or on the internet (although in some cases the bank will have an agreement with a high-street bank to allow customers to use its counters).

The smaller banks offer higher rates of interest on their business current accounts and lower charges than the high-street banks. They may even offer free banking, but again, check for a limit on the number of transactions you can make per month to see if you’re likely to exceed it.

Drawbacks

The absence of branches means that these banks are not an option if you need to drop in every day to deposit or withdraw cash. They are also unsuitable if you’re looking to your bank for advice, support or funding – it is strictly a banking service that they offer.

Who are they suited to?

Smaller banks offer a real alternative to businesses that run in credit, that receive direct payment from clients into their bank accounts and are not looking for funding or advice from their bank. Self-employed consultants or freelancers who work for just one or two clients, for example, should definitely investigate this option.

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