Using bank services for your benefit

The bank – the business partner you can’t do without

Key people are always in demand to help in running a business. Ask any farm owner to list out the

key people the look to in the running of the farm would probably result in a list containing- family,

adviser, vet and the bank might just make the list. Many people find it hard to put a label on “the

bank” – they find it hard to decide are they an ally or the enemy. However for most progressive

businesses the bank should be regarded as a significant ally in helping run the business from day to

day and to assist in achieving the long-term plans for the business

Banks essentially offer a range of money management services using various types of account

facilities. They also offer to sell you a raw material or product in the form of money or finance which

you can use to invest or meet the running costs of your business. In return the bank will look for

payment for providing you with its products or services in the form of bank fees, charges and on

borrowing they charge interest.

How your bank can help you out

Banks have two primary functions in assisting a business – helping with money management and to

provide finance should the business require it. The issuing of loans and other types of finance is the

element that most people focus on since it usually involves the borrowing of a significant amount of

money to fund a landmark investment in the business – the buying of land or the financing of a new

building, machine or additional livestock. While no doubt this particular bank function is significant,

of equal importance is the role a bank plays in helping to manage the day-to-day dealings of the

business which revolve around management of your current account, deposit accounts and short

term borrowing facilities such as overdrafts, stocking loans and credit card accounts.

The current account – the basics

The current account acts as the main point of contact between you, your business and the bank.

The account has a fairly complete record of all the trading carried out by the business over time -

how much money came in (usually income from sales or direct payments) and how much was paid

out to meet the running costs of the business and to cover personal requirements for cash. Banks

refer to the current account as the “track record” of a customer’s dealings with them. More

importantly the owner of the farm business can also make use of their own bank account data to

help manage day-to-day cash flow and to keep a track on spending.

The current account is truly the financial workhorse of the business. Receiving lodgements of

cheques and cash, other electronic transfers-in of funds such as EU direct payments, clearing

cheques drawn on the account to pay for inputs and services are all managed through the farm

current account. The way current accounts are being used has been gradually changing over the

years – there are fewer and fewer dealings with cheques and cash and more movements of money

using account-to-account electronic transfers. Banks are encouraging their customers are reducing

their reliance on both cheques and especially cash to conduct their day-to-day business and they are

being “encouraged” to do so by changes in the charges for managing a current account. The

traditional method of using a cashier in a bank branch to lodge cheque/ cash or to make a

withdrawal is becoming more expensive as a result of higher transaction charges and less convenient

due to lower availability of cashier staff at many branches. Farm business are increasing using

modern forms of handing their money including direct debits, standing orders, on demand electronic

transfers using mobile or internet banking, credit cards and debit cards. All of these methods of

transferring funds usually cost less in bank charges and allow speedier movement of funds between

Standing Order (SO) V Direct Debit (DD) – what’s the difference?

A standing order is normally set up by the bank account holder to create a regular (for example

every week or month) transfer of a fixed amount of money to another bank account. To set this up

you need the bank account details of the receiving bank – these details are the BIC (Bank Identifier

Code) and IBAN (International Bank Account Number). Most online banking systems allow you to

set up standing orders yourself which makes them a useful way to move money between your own

accounts – such as from your current account to a deposit account for regular savings.

A direct debit is a request from another bank account requesting the transfer of a variable amount of

money from the customer’s account. It requires that the customer have pre authorised this transfer

but rather than being initiated form the customer’s account (as with a standing order) the order to

transfer funds comes from the payee’s account. It is usually a condition of the operation of direct

debits that the organisation requesting the transfer must issue you with an invoice a number of

weeks in advance of the direct debit calling for the money so that you have a chance to query the

payment before it is made.

The long term trends in the charges imposed on bank customers and also the taxes imposed by

government on financial transactions are all encouraging less cash & cheque transactions and more

electronic/ card transactions. From 1st January 2016 there was a change in the charge for

withdrawing cash from a “hole-in-the-wall” ATM whereby 12 cents stamp duty is levied on each use

of a card to withdraw cash in this way subject to a maximum yearly charge of €2.50. Electronic

transfers usually still incur charges such as transaction charges, imposed by the bank and stamp duty

charges such as the annual charge on the use of credit or debit cards. These stamp duty charges are

much less in that there is usually just an annual charge for the use of a credit or debit card rather

than the current stamp duty charge of €0.50 on each and every cheque. Many people still prefer the

cheque as a method of payment as it allows them to record the details of the transaction on the

cheque stub with the expectation that this will make it easier to categorise the expense for accounts

purposes. Online transfers of money also allow you to add a message or further information to a

transaction so that you can trace what it was for at a future date.

Become account vigilant

With the potential for so many transactions to take place electronically, moving money in and out of

your account it is more important than ever to monitor your business current account on a regular

basis. Many businesses traditionally received a monthly bank statement although some banks

incentivise customers to do without this paper statement and move to an electronic-statement

service whereby the statement comes via email or is made available for viewing on the banks on-line

banking facility. It is a good idea to “check in” with your current account even more regularly that

once a month just to ensure that you monitor the following

 What is your balance? Is it around what you would expect?

 Do you know what all the various transactions (transfers in and out) listed for the account

were for?

 Can you see what future transfers are “pending” (due to happen in the next month) and will

there be funds there to meet these?

Most banks now have many options for you to keep tabs on your account. Online and mobile

banking has improved a lot with screens that are easier to navigate around and provide a lot more

options to use to help manage your accounts. You can group transactions together by category

(using the description attached to the electronic transactions) and also search for a specific cheque

by number or date. It is also possible to set up transfers of funds between your own accounts and to

other accounts in Irish banks or to foreign bank accounts. All the main banks are encouraging

greater use of their online systems so you should go online and check out what they have to offer.

Apart from monitoring your current account it is also good practice to annually check the total debt

the business owes to all the various financial institutions or merchants. A simple list of all the debts

with the main terms and interest rates completed once a year can keep the business owner in tune

with the main debt commitments and can focus the mind as regards how to manage the current

debt as well as assisting in decisions around taking on additional debt to fund a new investment

Golden rules of current account management

The cornerstone of good current account management is taking care to not write cheques for

amounts that exceed the account balance or not exceeding your maximum overdraft facility if an

overdraft is in place. Regularly incurring referral fees due to unpaid direct debits or bounced

cheques, where there are not enough funds in the account to meet these commitments, is seen as

indicators of an inability to properly manage cash flow. Similarly not abiding by the bank’s rules as

regards using an overdraft by bringing the current account back into positive figures (into the black)

for at least thirty days during the year is seen as a black mark on the current account track record.

This situation can be often be avoided by keeping the overdraft facility exclusively for meeting short

term demands for funds to meet the regular running costs of the business rather than spending it on

large outlays particularly relating to spending on large sum investments such as buildings or

machinery which usually don’t generate income quick enough in the short term to recharge the

account with funds. Apart from tarnishing your account management record any business that

exceeds its overdraft can also end up paying very high interest rates due to the additional of

surcharge interest levied on top of the overdraft interest rate.

Preparing a loan application

Another very useful support that banks offer is to assist businesses in financing significant

investments. Banks provide funds upfront to invest in the business and then allow the borrower to

pay the money back over a future set term. It is important to remember that this is a product that

the bank tries to sell you with a price attached – that is the interest charged. There is scope to

negotiate around rates but the bank will work through a formula to set their rate after assessing the

risk and the repayment capacity. Most banks price their interest rates based on a margin over the

“cost of funds” i.e. what it costs them to borrow the money on the money markets. Generally the

margin charged reflects the risk that the bank believes it is taking on by funding the investment.

Calculating a borrower’s repayment capacity is involves assessing the amount of free cash that the

business has potentially available to make repayments on the new borrowings. The following

formula gives an idea of how this repayment capacity is calculated in practice

Calculating Repayment Capacity

Net Profit (from accounts or eProfit Monitor)

Plus Non cash deductions (e.g. inventory change, depreciation charged)

Less Living expenses (household running costs, pension and health insurance payments)

Less Expected Income Tax to be paid

Less Principal to be repaid on current loans

(the interest fraction is already deducted in the calculation of net profit)

Less Annual cash spend to fund small investments and other outlays

Equals Free Cash available to make repayments on new loans

Apart from repayment capacity the bank will also look at your previous track record at managing

your current account (as outlined earlier), the amount of your own funds you will contributing to the

investment and the security you have available.

A detailed loan application form will supply the bank with much of the information they need but

additional information can also be used to support an application. Banks are now routinely

requesting three years of tax accounts, eProfit Monitor reports and ICBF reports if available to help

give a picture of the farm financial and production characteristics. Projected cash flows for three to

five years with a projected balance sheet for the same period can also be useful in demonstrating to

the bank that the investment is going to have a positive effect on the financial status of the business

over the term of the loan. The bank use these projections to satisfy itself that the loan can be repaid

and the business can still meet its other obligations as regards operating costs over the term of the

loan. Stress testing these cash flows by assessing the effect of higher interest rates and lower prices

for sales product are also routinely carried out by the bank.

For any business looking to avail of bank finance it is worthwhile to prepare well and have a clear

idea of what the loan will be used for and what effect it will have on the business. Backing this up

with well-prepared financial projections (cash flows) can greatly help in getting the best deal and

best terms possible from the bank.