Finance

Is your business hostage to your bank overdraft? (part I)

Peter Carruthers, Warrior Central

There are two vital partners in your business. They are partners because they hold more sway over your efforts than any other party. These two will give you more sleepless nights than any other gang. On top of that, they close more firms than you can conceive of.

The first of these crucial business partners is your bank. They process each penny that flows through your concern, and if they mess up, the results are dire. They control your financial record, but you pay the price if they make a mistake.

Your bank is also the first place to go when you need more money. Banks love businesses, because they always need more money. They are very good at dealing with entrepreneurs, because they deal with thousands each day. Most of us will only discuss money with a bank about once a year. Who do you think is better at it?

Before setting up my own firm in 1984, I was a banker. My banking knowledge helped my trading efforts a lot. But it was only when that first venture closed in 1992, that I really learned why banks make you sign as much paper as they do.

Let me explain. Your bank makes money by renting out the use of their money. They call it lending. The payment you make each month for the use of their money is called interest. It is the price of the money that you borrow from them. When you need a car, would you buy it without checking to see what other dealers might be offering it at? Buy it without asking for the price? When you borrow money from the bank, their job is to charge you the highest price they can. Your job is to pay the lowest price you can. Who wins? Here is a clue: 95.6% of overdraft users could slash 30% off their interest bill each year, if they had a little training about how to borrow money. 90% of business owners won’t even get an offer from a second bank. (No, not all banks are the same on any given day!)

On a R100 000 overdraft, that means that we give our bank R6 000 more than we should, each year, because we don’t know how to get that money more cheaply. If ten of us borrow money, more than nine of us are paying too much. In return for lending you some money, at a higher price than they have to, banks want security. Mostly, this means that they secure their lending by taking transfer of a piece of your home, or your life assurance contracts, or anything else that you might have that has value. In other words, they cannot lose if you make a mistake.

Your bank controls the flow of money through your account.

A while back, one of my clients called, in a panic. He had a R50 000 line of credit with one of the four big banks. He had paid a large cheque, from one of his clients, into his bank account. Then he had written out cheques to all his own suppliers. The incoming cheque bounced. As his suppliers paid in the cheques he had given them, his account balance fell below his agreed limit. So his bank bounced 20 little outgoing cheques. (Yes, they could have bounced four bigger cheques, but the cheques arrived in the wrong order, I am told.) He scrambled to gather enough incoming cash to get his account back to zero so that he could replace the bounced cheques. They bounced again. By now his bank had cancelled his facility because he had written so many bad cheques. (The bank is allowed to cancel your credit at any time, for any reason. As his cheques to suppliers started to bounce again, he tried to open a second bank account to regain control. But his new bank wanted proof from his old bank that he had not bounced cheques in the past 12 months…

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