The Banking Traps Every Business Owner Must Understand

Mike Smith, Director of Jameson Smith & Co
There has been no shortage of criticism directed at banks over their reluctance to lend to small businesses. Personally, I have seen many worrying things when dealing with the banks’ ‘relationship managers’. Gone are the days when they provided a service to businesses without expecting something in return.

And despite announcements such as Lloyds’ commitment to lending an additional £1bn to SMEs in the next 12 months, the recent furore from the Tomlinson review shows that in general banks still don’t treat SMEs well.

That’s why it’s so important to watch out for hidden traps when dealing with the banks. Here are some to look out for:


The Enterprise Finance Guarantee

The Enterprise Finance Guarantee (EFG) is a great scheme for businesses that do not have sufficient security, allowing them to develop and grow. Targeted at ‘viable businesses’, this government scheme aims to get banks lending, with the government underwriting part of the risk.

However, businesses taking advantage of it need to be wary of unsolicited calls suggesting converting your entire overdraft into an EFG loan, especially where you do not hold a personal guarantee. The EFG does not protect the director – it protects the bank if the company goes into default. But the scheme ensures directors will be held accountable for 100% of the loan borrowed via the personal guarantee. In effect, if the company goes into liquidation, it is the bank that is covered for 75% of the loan if they cannot recover the loan from you.

Unauthorised overdrafts

Beware of being refused a standard business overdraft, and being forced to use an unauthorised overdraft facility at a rate of 29.7% APR. You may think this is unusual, in fact this is a very common unauthorised overdraft rate. If the bank won’t change their position, try going elsewhere as there are other banks that may be prepared to offer you an overdraft.

Nevertheless, you need to demonstrate that you are managing your account reasonably well and show that you are clearing your unauthorised facility on a regular basis.

Personal guarantees

When guaranteeing the account personally, say no to the bank in the first instance and offer a debenture on the company assets. You may not have tangible assets, but you may have work in progress and due invoices in your pipeline to offer instead of personal guarantees. Be firm, stand your ground, and if you are not getting the service you need shop around for a better deal.

Business rates

Since most councils outsource business rate payments to private firms, there are more regulations in place now to protect businesses. However there are still firms who can be classed as ‘bullies’, so know your rights. Visit your council’s website and identify the relevant rules via the code of conduct. Or visit www.hceoa.org.uk/code-of-practice.html for the High Court Enforcement Officers or find the Bailiffs Code of Conduct at www.civea.co.uk.

Keep these issues in mind when dealing with the banks. Banks are all about managing risk, so put the odds in your favour and manage the bank’s downside by providing up to date and relevant information accompanied by a business plan.


Mike Smith is Director of Jameson Smith & Co, a business debt specialist. Mike provides business turnaround and insolvency advice and solutions to UK directors and accountants.

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