Banking costs to fall for small businesses
Small businesses should find it easier to compare bank accounts to find the best price and service, in light of new proposals from the competition watchdog.
The Competition and Markets Authority’s (CMA) provisional report into the current account market found that many small business owners don’t shop around for their current account, instead they open an account with the bank that holds their personal accounts.
The report states: “Banks do not need to work hard enough on price or quality of service.”
As a result, the CMA has suggested changes to the personal current account market, some of which will also apply to business bank account providers – such as making it easier to switch bank account and access transaction histories.
In addition, further specific recommendations for small businesses include:
- More transparent pricing for loans.
- Loan eligibility indicators, similar to those offered by credit card comparison sites to consumers.
- Increasing opportunities to use professional advisers.
These recommendations have been made as 90% of business banking customers only borrow from their current account provider, suggesting they are not shopping around between banks to find the best deals.
The proposed changes could save a typical small business £70 a year in current account costs, before considering the potential savings from cheaper loans and other credit facilities, claims the CMA.
Alasdair Smith, chair of the CMA investigation, says: “For too long, banks have been able to sit back and not work hard enough for their personal and small business customers.
“We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees.”
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.