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Banking services

This step looks at the services offered to businesses by banks.
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Most of you will have your own bank account and so you’d be familiar with how they work already. Let’s start off this module by considering the different types of services which bank or building society may offer to its customers. You may have these types of bank accounts yourself, and so do try to pick out those as you go through. There were three main types of bank account which we are going to consider here. The first is the current account, which is individuals’ or businesses’, normal working account. Most people or businesses will definitely have one of these. Cash and checks can be paid in to them when they are received.
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You may also be provided with a checkbook too which you can use to make payments from your account. Expenses can be paid by writing out a check and we’ll be looking closely at these later on. Most banks, if you request it, will allow an individual or a business an agreed level of overdraft. This means that on occasions if there are not enough funds within the current account cover all expenses, then the bank will still allow them to be paid up to the agreed limit of amount. The bank will then charge interests for providing this service to its customer.
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Whenever taking money to pay into the bank, do think carefully about the security of the cash that you may be carrying with you. It’s often best to travel to the bank in pairs, take different routes each time or go at different times of the day, always keep the money well hidden. The second type of account consider is a deposit or savings account. These are held by many businesses and individuals. This can be used to hold short-term extra funds which they may have. We may choose to hold the balances here as they will earn a higher interest rate when compared to the normal current account.
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Money from this account can be transferred back into the current account at any time if and when it may be needed. Some accounts do require notice if you do wish to do this. And so it’s always important to check the terms of the account prior to moving any money around. The third and last type of account here to look at is the loan account. Although an overdraft can be useful for short-term borrowing if larger funds are required that a separate loan account should be used. This can be useful for buying non-current assets of the business, like plans, machinery, or motor vehicles, for example. Loans can be offered to both individuals or businesses.
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When making loans to a business, they are often called secured. This means that the bank will have rights over the assets if the loan is not repaid for any reason or instead of this, a personal guarantee may be given by the owners of the business. So for example, if the business could not repay the loan for any reason then the owner would have to instead. If property has been purchased then a mortgage would be taken out instead. We often have these on our own homes and they’re normally for a period of around 25-35 years on a secured on the property itself.
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Therefore, if the mortgage was not repaid, the bank could sell a property in order to get that money back again. Now that we’ve covered the services which a bank or building society may offer to its customers, let’s move on and consider the different payment methods which are available to businesses, as we mentioned earlier in the module introduction.

Watch the video above to hear the Kaplan tutor talk through the different services offered by banks to businesses.

Traditionally, there was more of a difference between the services offered by banks and those offered by building societies. But since banking laws were changed, building societies are now able to offer more services that are equivalent to those offered by banks.

People and businesses have bank accounts so they do not have to keep all their money as cash. There are three main types of bank account:

  • current accounts
  • deposit or savings accounts
  • loan accounts.

Current accounts

The current account is a business’s normal working account. Cash and cheques received from customers are paid into this account. The business will be issued with a cheque book so that expenses and suppliers can be paid by writing cheques.

Current accounts are also the most common form of account for personal customers.

Overdraft

Most banks will, on request, allow a business (or indeed a personal customer) an agreed level of overdraft. This means that on occasions when the current account does not have sufficient funds to cover cheques issued by the business, the bank will still honour those cheques up to the agreed overdraft limit.

The bank will charge interest on any overdrawn balances and often an arrangement fee for the setting up of the overdraft facility.

Deposit or savings accounts

Deposit or savings accounts are held by many business and personal customers. The interest earned on deposit account balances is often considerably higher than that on current account balances.

A business can use a deposit account to house short-term surplus funds in order to benefit from the higher interest received. The money can then be transferred to the current account if it’s needed.

However, some types of deposit / saving account require a period of notice before funds can be transferred or removed from the account.

Loan accounts

As we have seen, an overdraft can be a useful method of short-term borrowing to fund the everyday expenses of a business. But if larger funds are required (for example, for the purchase of plant and machinery) then a separate loan should be taken out. Loans are usually at a lower rate of interest than an overdraft.

A business loan can be made to all types of business and will normally be secured in some way. This means that the bank will have rights over the assets of the business if the loan is not repaid – in other words, the bank can take ownership of the assets and sell them off to recover the amount owed.

Alternatively, the bank may ask for the personal guarantee of the owner of the business.

For buying property, a commercial mortgage can be provided. This is normally for a period of 25 years and is secured on the property itself – if the mortgage is not repaid, the bank can sell the property to recover its money.

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Other Accounting Functions: Payroll and Banking

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