May 3, 2019 285
May 3, 2019 285
Banks perform very important functions in any modern economy. They provide a variety of financial services which facilitate transactions between business enterprises and their customers and suppliers.
They also provide advisory and technical support services which help business enterprises to solve their operational problems.
A small business enterprise would normally seek to establish and maintain favorable relationships with its customers and suppliers. By doing so, it is able to enjoy the patronage and loyalty of such customers.
It is also assured that its suppliers would regularly provide it with goods and services at competitive prices. Banks are a special type of supplier to the small business enterprise. It is therefore important for the small business to win the support and favor of banks and to sustain the relationship over time.
To establish and maintain a favorable relationship with banks, the small business owner and entrepreneur needs to understand the following:
Any entrepreneur can benefit from the services provided by banks but it is required that he must be a customer of the bank (open an account with them) and in most cases operate a current account.
A customer that operates only a savings or deposit account may not be able to take full advantage of the services provided by banks. For instance, a savings account customer cannot be granted an overdraft.
Below are the services that a customer can obtain from banks
This is a credit facility granted by the bank that does not require that the beneficiary has a current account. Loans can be short-term, medium-term or long-term. Loan facilities usually attract high interest and are usually secured with tangible collateral securities like land, buildings/real estates, bonds, insurance policies, etc. Banks usually require a lot of documentation such as completion of application forms.
Many atimes business transactions usually require movement of cash and to ensure the security of cash, movement banks devise funds transfer media for their customers. Examples of funds transfer facilities are bank drafts and electronic transfer services.
A bank draft is a cheque issued by a bank at the request of a customer to a named payee. Since the cheque is issued by a bank, the payee has confidence that the cheque will be honored when it is presented for payment. The bank charges some commission for the service.
This is a situation where the customer gives his bank’s name and address to another bank or supplier for reference purposes. This makes it possible for the bank to provide independent and confidential information about the customer’s financial standing to his business associates. When banks give good reports about their customers, it will enhance the confidence of business associates intending to enter into business dealings with the customer. Status inquiry reports are often framed in such a way as to indicate considerable confidence, satisfactory or some degree of doubt in the financial standing of the customer.
Banks also act as facilitators of international business transactions for the entrepreneur when he goes into export and import business. The bank usually does this by providing the customer with foreign exchange foreign bills and traveler’s cheque.
This is a service that is usually rendered to contractors in the building industry. The bank does this by guaranteeing that the contractor who is tendering for a contract will execute it in accordance with the agreed terms and it undertakes to reimburse the would-be client in the event that the customer (contractor in this case) defaults. Usually, the banker also obtains a counter-indemnity (or cash cover) from its customer. All this is usually done at a fee payable by the customer.
Leasing services are part of services bank renders for their customers. Usually, this service is done by Merchant Banks and Community Banks. Leasing is a contract in which one party, called the lessee, in return for paying an agreed rent, uses a capital asset belonging to another party called the lessor. There are basically three types of lease contracts namely finance lease, sale and lease back arrangement, and operating lease but it is the first two that relate to banks.
In a finance lease, which is usually of medium-term duration the lessor only provides the finance for the lease. The lessee chooses the asset and the lessor provides the finance. This is a good avenue for an entrepreneur to purchase capital assets for the business. This is because the lessee who now becomes the owner of the asset pays periodic rent to cover the cost of the capital equipment, the lessor’s expenses interest on the capital outlay and profit margin.
In a sale and lease back arrangement, the lessee (entrepreneur) has the opportunity of obtaining funds to be used as working capital as well as using the capital equipment for his business. The arrangement is such that the lessee sells its capital equipment to a bank and thereafter enters into a contract to lease the equipment. The main advantage of the sale and lease back transaction is that money will immediately be available from the sale of the company’s asset which plowed back as working capital and the company still has the privilege to use the asset.
Another service that banks render to their customers (entrepreneurs) is the purchase of a company’s debt by a factor (or agent – in this case, the bank). This is usually referred to as factoring and it is done “without recourse”, (i.e., if the factor accepts the company’s debt and the customer defaults, the factor will suffer the loss).
Hence, factoring enables a company to sell its trade debts for immediate cash to a factor who charges a commission. The banks can, therefore, provide the entrepreneur the opportunity to sell his trade debts to get more cash that can shore up his working capital requirement.
Another service a bank renders to a customer is that of standing order payments. Customers making regular monthly or quarterly payments to an insurance company. Client, government agency or club, etc may give banks standing instructions to effect such payments as and when due on their behalf.
Banks also render business advice to their customers (entrepreneur). This is usually aimed at assisting small business enterprises to develop their businesses. Banks provide a wide range of advisory and investment services to their customers.
The deposits into current accounts are repayable and they are called demand deposits. Although the accounts must be kept on credit, overdraft facilities can be granted in which case the customer can overdraw from his account up to a limit agreed with the bank. Interest is paid on any amount by which the account is overdrawn. Sometimes collateral security or guarantee may be required to grant an overdraft facility.
Savings account that does not require the use of a cheque book. The interest is paid by the bank on the deposit. Savings accounts are used mainly by small depositors to save for the rainy day. The depositors can withdraw from their accounts by using a withdrawal form issued by the bank for that purpose. One of the major differences between a current account and a savings account is that unlike the current account, the depositor must be physically present before a withdrawal can be made. A third party cannot withdraw from such account and cheques cannot be issued. However, dividend warrants can be paid into a savings account.
This account is used for savings but unlike the savings account the depositor cannot withdraw from the account until it matures i.e., the money can only be withdrawn at the expiration of the time that was agreed upon between the customer and the banker. By this arrangement, the customer is entitled to interest at a much higher rate than the savings account.
This is a short-term credit facility which allows a customer to overdraw his current account up to an amount agreed upon with his/her banker. Interest is paid on the amount overdrawn. The entrepreneur can take advantage of such facilities to augment working capital needs or to meet other short-term financial obligations.
The customer and banker relationship are governed by the general law of contract. A contractual relationship is created between the customer and the banker the moment the customer offers to open an account and the bank accepts the offer. This implies that there are various ways in which a small business enterprise can establish a relationship between it and a bank.
Beyond these technical and legal relationships, the most useful relationship that should be cultivated by the entrepreneur is with his banker friendship, adviser and confidant. These relationships facilitate the technical–legal relationships and make it possible for the entrepreneur to obtain the support and sometimes, a preferential treatment that he needs to operate the enterprise successfully.
In cultivating the friendship and so on of the banker, the entrepreneur must understand that the bank is in business to make a profit and the banker is subject to banking laws, rules and regulations.
In particular, the banker wants to keep his job and ought not to be put in a position to violate the norms and practices of the bank. This means that the entrepreneur must constantly play the game according to the rules and with the utmost integrity. This is the basis of a sustainable and mutually beneficial relationship between the business enterprise and its bankers.
The important decision to choose a banker is not an easy one with so many banks around promising a wide variety of services. The entrepreneur needs to carefully select the bank with which he desires to establish a business relationship. The right bank is the one that understands your business and is supportive of your efforts. Switching from one bank to another frequently is not a good business practice.
The factors to consider in selecting a banker include the following:
The account opening options available to the entrepreneur are the individual account, sole proprietorship account, partnership account, and the corporate account. In this section, we shall briefly outline the typical account opening requirements for each of the above-named accounts.
This account is opened in the entrepreneur’s own name rather than in the name of his/her business.
The underlined below are the typical requirements for an opening bank account:
The typical requirements for opening this account are:
For this type of account, the typical requirements are similar to those of a proprietorship listed above except that in addition, the partnership must provide the following:
The requirements for this type of account which is for a limited liability company are:
Banks are profit-making organizations which derive their revenues from what their customers pay for the services rendered to them. These are generally referred to as bank charges, which may be in the form of commissions, fees or interest. The following are the most common types of bank charges that customers would most likely incur while dealing with a bank.
Banks also charge- interest on loans and overdraft facilities granted to their customers. Such interests are usually debited to the accounts of their customers. Interest rates vary from bank to bank and from time to time depending on the Central Bank of Nigeria’s guidelines on credit.
For loans granted to their customers, banks charge them a particular percentage of the loan as processing and management fee. The processing and management fee is the cost of the paperwork and administrative job done by the bank. This cost also varies from bank to bank and from time to time.
This is a commission that is based on the volume of transactions that the customer made with the bank. By volume of transaction, we mean the volume of withdrawal or the total amount of withdrawal. Although it may be lower as it is negotiable, the COT is usually between three and five naira (meaning between three and five naira per every one thousand naira withdrawn) as of the time this article was drafted.
One of the services offered to customers by banks as mentioned before is allowing them access to bank draft and cheque issued (certified cheque) facility to facilitate the transfer of money. This service is not without a charge.
The charge for this type of service which is usually uniform among the banks is called commission on draft and cheque issued. The commission is usually uniform because it is as prescribed in the banker’s tariff. Again commission on bank draft is usually higher than that on the cheque issued.
The banks also usually deduct the cost of cheque book from the customers’ account. The cost of checkbook is usually the stamp duty cost (which is the cost of printing the cheque) and a commission which is usually charged by the banks. It should be noted that the commission varies from bank to bank.
Banks charge, Value Added Tax on COT and most other commissions which they remit to the appropriate federal tax authority. They also charge withholding tax on the interest which they also remit to the appropriate state tax authority. Whatever the tax, it is usually debited to the customer’s account,
It is important to note here that banks charge different types of fees, commissions, and interest on most of the services they render to their customers.
A business account is that which is opened with a bank in the name of the business – enterprise and solely for the purpose of transacting the banking operation of the business enterprise. One of the first activities that an entrepreneur should undertake after establishing his business is to open a separate bank account for the business enterprise.
This action is a critical step toward separating the personal finances of the entrepreneur from those of the business enterprise. It is a necessary step toward treating the business enterprise as an entity separate from the person of the entrepreneur and it paves the way for more efficient management of the finances of the business.
By opening a business account the entrepreneur creates a relationship between the bank and the business enterprise. This enables the business enterprise to utilize benefit from the services provided by the bank. Record of payments into and withdrawals from the bank account of the business creates a database on the business enterprise and its operations. This database is useful to both the entrepreneur and the bank.
To the entrepreneur, it provides information on the actual cash position of the enterprise and a basis for controlling his/her operations. To the bank, it is a source of authentic information about the business which is used to assess the risk of granting credit facilities to the business enterprise. Without such information, the bank will not be in a position to grant any credit facilities to the business enterprise.
The bank will also be unable to provide any information to third parties who may need a reference from the bank to be able to transact business with the business enterprise.
The manner in which the entrepreneur operates the account of the business enterprise indicates to the bank the financial discipline and integrity of the entrepreneur. All of these are taken into account by the bank in granting facilities to the business enterprise.
One of the duties of the bank is to periodically (monthly preferably) make available to the customers their statement of account called the bank statement. The bank statement usually shows all the debit and credit entries made into the customer’s account.
At this point, recall that the entrepreneurs are expected to keep records of all their transactions. One of the accounting records is called the cashbook in which cash payments and receipts are entered.
Bank reconciliation is the process of ensuring that the balance on the bank statement issued by the bank agrees with that which is in the bank column of the cashbook.
There are many reasons why the bank statement balance will not tally with that of the cashbook.
Some of the major reasons are:
In order to carry out bank reconciliation, the entrepreneur will have to take the following steps:
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