7.1 Bank accounts

• Two major types are current accounts and deposit accounts.

Current account

• Used for day-to-day business trading.
• Customer receipts such as cash and cheques are paid into the account.
• Payments such as wages and suppliers’ bills are made from the account.
• Banks supply facilities such as cheque books and paying-in books.
• The training material notes that most banks do not pay interest on current accounts and may charge administration and transaction fees.
• Charges can include periodic fees, deposit/withdrawal charges and fees for items such as dishonoured or stale cheques.
• A stale cheque is described in the material as one more than 6 months old and not paid by a bank.

Deposit account

• Not normally used for day-to-day transactions.
• Interest-bearing account for surplus money not immediately required in the current account.

7.2 Bank drafts

• A bank draft is described as a simple and secure way of transferring money.
• To obtain one, the customer completes an application giving details such as:
• Date
• Payee’s name
• Name and address of the bank at which the draft is payable
• Amount
• Sender’s name and address
• The customer pays for the bank draft in advance.
• The draft is sent to the payee and the bank advises the receiving bank.
• The payee collects payment from the named bank.
• The training material describes a bank draft as being as good as cash, without the risk of a cheque being dishonoured, and more secure than cash because only the named person can collect the payment.

7.3 Standing orders

• A standing order is an instruction from a bank customer to the bank to make specified payments on regular dates.
• Examples include mortgage repayments, insurance premiums and hire-purchase repayments.
• The customer retains control: the bank follows the customer’s instruction.
• When the customer tells the bank to stop, the bank must stop the payments.

7.4 Direct debits

• A direct debit is an authority/mandate allowing a nominated person or organisation to take money directly from the customer’s account.
• Commonly used for utility bills and by fuel companies.
• Unlike a standing order, the amount can vary and the supplier normally initiates the payment.
• The customer must cancel the direct debit arrangement if they no longer want the third party to take payments.

7.5 Credit transfer

• A credit transfer is an electronic transfer of money from one account to another without using a cheque.
• Common business uses include paying staff wages/salaries and suppliers.
• The training material states that banks charge a flat transaction fee, generally lower than cheque processing costs.
• BACS (Bankers’ Automated Clearing System) is identified as the principal UK credit-transfer system used by larger businesses.
• A business can submit details of multiple suppliers and their bank accounts for payments to be made automatically.
• Smaller businesses may find internet banking more suitable than formal BACS runs.
• Internet banking allows separate payments to be made quickly, including immediate or future-dated payments.
• A remittance advice is normally sent to the supplier, showing which invoice(s) are being paid and the amount.

7.6 Loans and overdrafts

Business loans

• Banks may provide business loans where there is a good commercial justification and suitable security.
• The training material describes ‘small’ business loans as those up to £25,000 and amounts above this as larger loans.
• Loan duration and interest rate are negotiable.
• Once established, a loan normally has limited flexibility because repayment amounts and dates are fixed.
• There may be a penalty for early repayment.
• Alternative funding mentioned includes venture capital and peer-to-peer lending.

Overdrafts

• An overdraft allows a customer to withdraw more money than has been paid into the account, subject to an agreed facility.
• It must be arranged in advance.
• The bank may charge an arrangement fee and interest on the outstanding balance.
• An overdraft is flexible and useful for short-term or unexpected expenditure.
• Overdraft interest rates tend to be high, so the training material advises using a formal loan for longer-term purchases.