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Finance Considerations for Small Business
Finance Considerations for Small Business
By: Law 4U
Planning finances
Discuss with your accountant:
- start-up costs, including fixtures and fittings;
- funds you will need for the acquisition of stock and equipment;
- sources of finance;
- suitability of various finance options etc.
Sources of funds
Finances can be obtained from:
- banks;
- finance companies;
- merchant banks;
- insurance companies;
- friendly societies;
- solicitors' trust funds;
- trustee companies etc.
What to ask
Make sure the financial institution tells you:
- what additional costs are attached to any loans/overdrafts etc (other than interest);
- what is the interest rate;
- is the interest rate variable or fixed, and what are the advantages/disadvantages of either;
- what security is required for the loan; and
- are personal guarantees required for the loan.
Borrowing funds
The financial institution will want to know:
- the purpose for the loan, e.g. for fixtures and equipment, ongoing funds for working capital;
- how much money you need, e.g. an overdraft of $50,000 for the first twelve months;
- the amount of funds contributed by the business owners/shareholders;
- how the loans will be repaid;
- the security that will be offered to support the loan;
- the intended market for the product, and the market research to support the business plan;
- the intended business structure;
- experience of the owners/managers;
- your financial history, or the financial history of the business;
- the assets and liabilities of the business;
- on-going measurements of the business performance;
- any arrangements that have been made with other financial institutions etc.
Banks
You will probably want to enter into a long term relationship with a trading bank. Banks can:
- provide cheque accounts for paying bills;
- allow the business an overdraft facility;
- sometimes provide ongoing business advice etc.
Cheques
A cheque tells the bank to pay the person or business named on the cheque. Some relevant issues are:
- who is the proper person to pay. A cheque that is crossed with two parallel lines is "not negotiable" (make sure you write these words), and usually must be paid into a bank account rather than paid over the counter;
- if the cheque is uncrossed it is "open", and can be paid to the named payee or anyone who presents it if it includes the words "or bearer" (this is often printed on the cheque and must otherwise be crossed out). An open cheque is not secure. It is also possible for the payee to authorise the bank to pay a third person if it is properly endorsed;
- the bank will usually "clear" the cheque, at which time the money is paid to the account of the payee;
- the bank will not pay out on a "stopped" cheque. The payer instructs the bank not to clear the cheque. Usually the instructions to the bank have to be in writing. A co-signatory of a joint account can stop a cheque;
- there must be sufficient funds in the payer's account to cover the amount of the cheque. If the cheque "bounces", it will be sent back to the payee, who will, of course, want the payer to explain why it bounced. Of course, the payer may have an overdraft facility which allows the account to be "overdrawn" to a certain amount.
Complaints against banks
If you have a complaint, you have a number of options.
The Australian Banking Association has introduced a Code of Banking Practice which sets out a minimum standard of practice that is binding on banks. The complaint process is initiated by a written complaint to the bank, which must then begin an internal investigation.
If you are unhappy with the response of the bank, the Code requires an impartial third party to be used to settle the dispute.
The third party is often the Banking Ombudsman. As a general rule, they can consider your dispute if:
- it is about a financial service provided by a member bank or an affiliate;
- you are an individual or a small business; and
- the amount you are claiming is less than $280,000 (check with the Ombudsman for confirmation of an up-to-date figure).
Contact the Banking Ombudsman to check whether this service is available for your small business.
Note that the Ombudsman may be able to arrange for an interpreter to explain your complaint.
Your relationship to a bank?
As you may have guessed from all the fine print, you have a contractual relationship with your bank. A contract is an agreement that is legally binding and therefore enforceable under the law. This contract will probably be entitled “Conditions of Use”, and may be given to you as a pamphlet when the account is opened. Why all the fine print? From the bank’s point of view, it is to ensure you understand the nature of the relationship. Unfortunately from the viewpoint of the consumer, it’s often too much to take in (even if it could be understood in full). The Code of Banking Practice required the bank to provide all customers with the terms and conditions, in writing, which apply to their contract. The best advice is to read it and write down any questions that you have. You should not enter into any contract that you do not understand, and you are entitled to ask the bank for any clarification you require.
Of course there are many different types of bank accounts, and therefore different types of contractual relationships, but a written contract must be provided in each case.
Read this: This fact sheet is intended to be general information about the law in
© Lawscape Communications P/L
Last Updated – February 2008
