Friday, 5 March 2010

Bank of England at 0.5% but unauthorised OD at 29.5% - Entrepreneurs beware

As an educator and mentor to many small firms - I am regularly asked about the behaviour of banks towards entrepeneurs, small firms and those that are riding through tough times. Why do banks not lend, support, how come I get no assistance when I want to grow and so forth?

When I saw the news - that the Bank of England interest is at 0.5% and yet the unauthorised overdraft is at 29.5% - I did feel a sense of outrage. If you go over the limit you have to pay - and I suppose that is "fair enough" - except that the Bank's profit margin is huge. Then here is the rub - you can become "Unauthorised" at the discretion of the bank - it is further in - in the small print - so even if you cause no offence - if the local bank manager decides he no longer wants to support you he can pull the OD facility from you and stick you on the "unauthorised" schedule!! Haha!

Before we decide what to do next - look at the small print:

About 5 clicks in on a pdf document at Barclays is where I found the charges for those who go over drawn without prior authorisation. Here are some extracts. And the story is the same at a couple of other banks that I checked.

" consider making our overdraft service
available to you before your account goes overdrawn or before
you exceed an agreed overdraft limit. Overdrafts provided in this
way are cheaper than unauthorised borrowing.
............The interest rate for unauthorised
borrowings, including those within the £30 buffer zone, is
charged at 29.5 per cent a year..........Additionally, if an item is returned unpaid due to there being
insufficient funds in your account, we will charge you an
Unpaid Fee of £35 for each such payment, which is our fee for
having considered whether to process such payment....."
So - there are some serious learning points:

Ensure you have a good financial director on your board, someone who knows the local networks of managers at local banks, good accountants etc., and can lobby on your behalf if needed. There are many other tips that migth be available and I am going to leave it to the wisdom of the crowds to populate the internet with ideas and suggestions...