Banking services

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.