Banking Products for Your Business
When you open your business for the first time, you immediately face many questions. In previous articles, we examined in detail the issues related to the registration process of individual entrepreneurs and LLCs. But after registering a business, other questions arise. One of them: “How can banks be useful to me for business development?”
In this article, we will answer this question and analyze in detail the main banking products, their benefits for business and the most profitable and technological offers from banks.
Settlement and cash services
One of the first products that you have to use is cash and settlement services. Opening a current account is mandatory for an LLC and has many advantages for an individual entrepreneur, although it is not mandatory for them. After opening a current account, you can legally pay with counterparties, receive payments from clients, it will be easier for you to pay taxes and prove your case in court if you have disagreements with one of your partners.
Moreover, after opening a current account, you will be able to get access to other banking products.
The second service that today’s business can hardly do without is acquiring. This is a device required to accept card payments from customers. At the same time, the bank will withhold a commission from each client’s operation. As a rule, funds are credited to the account on the next business day. There are three types of acquiring: merchant, mobile and internet acquiring.
Merchant acquiring is used to pay with bank cards in stores, Internet acquiring is needed to pay for purchases on the Internet. Mobile acquiring is used less often and is necessary, for example, for delivery services that do not have access to the network. Although, as practice shows, delivery services are more actively using classic merchant acquiring.
Also, pay attention to 3 options for installing merchant acquiring: rent, buyout and free. In the first case, the terminal belongs to the bank and you pay a fixed rental amount every month. In the second case, you redeem the terminal and it becomes yours, this is more profitable than the first option if you come into business “seriously and for a long time” but requires large investments at the start. In the third case, the bank only retains the transaction fee, which, of course, is the best option.
For Internet acquiring, the rate is usually higher. When you first contact the bank, you will most likely be offered a rate of about 2.8%. But depending on your turnover, field of activity and the importance of your company for the bank, the rate can be significantly reduced.
In addition to acquiring terminals, banks will help you purchase or rent an online cash register.
Each online cash register is equipped with a fiscal drive, which transfers all sales data to the tax office through the fiscal data operator. This simplifies the process of Internal Revenue Service control over organizations, which should reduce the number of tax audits. For business, the introduction of online cash registers makes it possible to monitor employees and analyze sales. In the application, you can usually track not only the sales volume but also the balance of goods, the average bill and the amount of demand for specific goods.
You can purchase an online cash desk from both a specialized company and a bank. Most banks offer the possibility of renting an online cash desk. This can be especially beneficial for a new business when there is not enough money for a large purchase, and the prospects for their business are still vague.
POS lending is another service that banks can help in increasing sales and growing your business. POS-credit (“point of sale”) allows the client to issue any loan at his/her point of sale.
For this, a client usually needs only a passport and 30 minutes. In case of a positive decision and signing of the clients’ documents, the bank transfers the money directly to the bank account of the organization, after which the goods can be returned to the client.
The difference between an installment plan and a loan is who pays the interest. With an installment plan, the company makes a discount on which the bank charges interest, so the client does not have an overpayment and he/she buys the goods at the initial cost. With a loan, the client pays all the interest, so the product will become more expensive for him/her.
This service is in demand for companies specializing in the sale of electronics and household appliances, repairs and construction, sale of equipment, etc. POS lending is in great demand due to the simplicity of design and the factor of emotional demand. Therefore, if your business falls within the criteria described above, it will be useful to connect this service.
Cash collection is the process of collecting and transferring cash proceeds (or other tangible assets) for storage in a bank, which complies with legal requirements and guarantees the safety of your funds. There are several options for collection: independently, or with the help of a bank or specialized companies.
In the first case, you personally or a special service created by you collects money from all your points of sale and delivers it to the bank. You can deposit them through an ATM or directly at a bank branch. At the same time, all the risks associated with the delivery of funds, as well as the costs of maintaining this service, are borne by your organization.
If you use the services of a bank or a specialized company, then they bear all the costs and risks. You will need to collect and calculate the proceeds before their arrival, as well as fill out the accompanying documents.
Business loans have several important differences from personal loans.
The first thing to look out for is that almost all business loans require collateral. As a rule, this is either a pledge of the company’s assets (real estate, equipment, goods in circulation, shares in the authorized capital, etc.) or a surety (the founders of the company, as well as other legal entities and individuals).
Very rarely, a bank will give a business loan just like that. As a rule, the bank provides a loan for a specific purpose and checks how the loan funds were spent. There are the following loan purposes:
- Loan for current activities (replenishment of working capital or purchase of movable property). As a rule, the maximum term of such a loan is limited to three years. Lending limits and interest rates depend on the company’s turnover and loan terms. Depending on the bank, collateral and a report on the targeted spending of funds may be required;
- Loan for the purchase of fixed assets. It can be used to buy equipment, vehicles, special equipment, real estate. Repayment is made in equal installments. Collateral is goods in circulation, equipment, vehicles, special equipment, real estate, including those purchased with credit funds;
- Commercial mortgage. This banking product is used to purchase non-residential real estate (offices, warehouses, production areas). The acquired property acts as collateral. It has a maximum loan term (up to 30 years) and higher interest rates compared to mortgages for individuals;
- Investment loan. This banking product is provided for a specific investment project based on a specific business plan and financial statements. The existing assets of the enterprise act as collateral.
Leasing is a form of lending based on the acquisition of a leased object for lease with or without the right of subsequent redemption. The difference from a loan is that after buying a property on credit, your company immediately becomes its owner (although this purchase is secured by your property).
In leasing, the property you need is acquired by the leasing company, which is listed as the owner of the property. It then leases the property to you. You pay your rent as scheduled. At the end of the specified period, you can buy out the property at its residual value or return it to the lessor.
A bank guarantee is a promise from a lending institution that ensures the bank will step up if a debtor can’t cover a debt.
- Competitive (tender) guarantee is required in order to prevent the winner of the tender from refusing to execute the order;
- Guarantee of the contract performance (agreement) – in case of failure to fulfill the terms of the contract by the principal, the bank will pay compensation under the contract to the beneficiary;
- Guarantee of the return of the advance payment – the bank guarantees the return of the advance issued by the customer to the contractor in case of non-fulfillment of the terms of the contract by the latter;
- Guarantee of payment – guarantees payment to the beneficiary within the period established by the agreement for the goods delivered or services rendered; it is paid if the principal fails to fulfill the terms of the agreement;
- A customs guarantee is a type of bank guarantee that is used in the case of temporary importation (equipment, goods, etc.) into the territory of another state for participation in an exhibition or for the period of construction, etc. The customs regime of temporary import does not imply the obligation to pay import duties.
Letter of credit
A letter of credit is a monetary obligation accepted by a bank on behalf of the ordering party (payer under the letter of credit), which allows payment to be made in favor of the beneficiary (recipient of funds under the letter of credit) upon documentary confirmation of his/her fulfillment of the terms of the agreement or contract.
The bank that issued the letter of credit has the right to independently make payments due, accept or post a bill of exchange, or instruct another bank (the executing bank) to fulfill these obligations. The main advantage of a letter of credit is a guarantee of the reliability of the transaction for both parties to the agreement.
The payer does not risk money since the beneficiary will receive money from the bank only if he/she fulfills all the conditions of the agreement and provides supporting documents to the bank. In turn, the beneficiary is sure that he/she will definitely receive the payment after he/she fulfills the terms of the agreement and submits the necessary documents. As a rule, letters of credit are used when working with new counterparties, major transactions or during export-import operations.
- Revocable and irrevocable letter of credit. A revocable letter of credit can be canceled or changed by the payer at any time without notifying the beneficiary. As you can see, the very essence of the letter of credit is lost;
- Cumulative and non-cumulative letter of credit. If the bank allows the payer to credit the amount not spent under the current letter of credit to the account of the new one, such a letter of credit is called cumulative. If unspent money is returned to the payer, it is a non-cumulative letter of credit;
- Transferable letter of credit. A transferable letter of credit allows the payment to be made to another beneficiary who is not the payer’s counterparty for a particular transaction. In this case, the payer must submit an application to the bank and indicate who has the right to receive money under the letter of credit;
- Revolving letter of credit. It is opened when the deal is stretched out in time. For example, a seller delivers goods in batches, and a buyer pays in installments. In this case, the payer can deposit money for the letter of credit as the settlements take place;
- Letter of credit with a red clause. It gives the beneficiary the opportunity to receive an advance payment before submitting all the necessary documents;
Confirmed and unconfirmed letter of credit. At the request of the bank that issued the irrevocable letter of credit, another bank can confirm it. After that, the confirming bank is obliged to pay to the beneficiary.
Factoring is a type of financing for mutual settlements between sellers and manufacturers with buyers working with deferred payment. As a rule, there are usually three parties involved in a factoring operation: the supplier of the goods (the lender), the buyer (the debtor), and the factor (the factoring company or bank).
The main activity of the factoring company is lending to suppliers through the purchase of short-term receivables, usually not exceeding 180 days. The supplier of the goods enters into an agreement with the factoring company that invoices or other payment documents are presented to it as requirements for payment for the delivery of products arise.
The factoring company discloses these documents by paying the client 75-90% of the value of the claims. The factor pays the rest of the claims after the buyer has paid off the debt, withholding a commission from the supplier for using the service.
Forfaiting is a banking operation involving the acquisition by a financial agent (forfaitor) of a commercial obligation of a borrower (buyer, importer) to a lender (seller, exporter). In this case, all risks on the debt obligation are transferred to the forfeitor, and the seller is not responsible for the buyer’s insolvency.
Forfaiting allows the seller to receive the entire amount from the buyer minus the forfactor’s commission, which allows reducing accounts receivable and avoiding the risk of delay in funds. At the same time, it is possible to sell not the whole debt but only part of it.
The advantage for the buyer is that he/she can stretch out payments under the contract or get a deferral to pay the debt. The forfaitor immediately receives a commission from the seller. If he/she wishes, he/she can sell the debt on the secondary market for forfeiting securities, which also allows him/her to reduce the level of his/her risks.