The recent problems experienced by one of Australia’s top four banks shows just how much people rely on their money ‘being there’ when they want it. This problem could have occurred at any of the financial institutions. So, how do you protect yourself from banking blunders like this?
Most business owners will have been forced to endure some sort of banking blunder.
Many are self-created but others are the product of glitches, silly processes or opaque banking terms.
A fellow business builder recently copped the worst of banking bureaucracy when she used the company credit card to pay a bill on the day of the account’s monthly reconciliation. Whereas her internet banking account showed a positive balance on the credit card, the apparent (and false) availability of funds had been generated by the automatic transfer of money from an attached overdraft, which did not have the requisite funds to cover the credit card’s limit.
This transfer did not appear on the associated overdraft’s online banking statement, and would not for another 24 hours, creating the perception that the funds were available. Some banks call this the monthly ‘sweep’. But what it meant for my friend was the accidental expenditure of funds not available, triggering a default and the suspension of her company credit card.
It took my friend five days to work out what the heck had happened, while also forced to manage her business without a credit card.
Are your eggs all in the one banking basket?
Last week, hundreds of thousands of Australian businesses also discovered the pain of trying to run a company without a bank.
It prompted me to devise the following guide, explaining why it might be prudent to share your banking requirements between banks.
Whether you like it or not, all of your income usually passes electronically through an account of some kind. It might be your salary, rental income from an investment property or sales from your business. What I would like you to think about is:
- Who controls this money?
- What happens if the bank decides to hold back some of this income from my account?
- What happens if all my income is in the one account and that account is somehow frozen? (Line of Credit anyone??)
- What happens if the bank I’m with has some type of problem and I can’t access my funds?
You may not have ever thought of this before.
In fact, you probably think it’s so much easier just to have all of your banking with the one institution. That might sound convenient, but it’s also dangerous.
What is entanglement in banking?
Banks and other financial institutions set sales targets for their staff that are usually designed to capture as many of your services as possible.
The more products and services you have with a bank the more profit they make via fees and charges, interest spreads and the use of your cash
The other reason for selling you multiple products and services is something called entanglement.
Have you ever thought about leaving your bank? Why don’t you think through it now? Just how many accounts, loans, insurances, credit cards and other items would you have to re-arrange?
Usually banks like you to have at least three of these loans, cards or accounts with them.
The more you have, the harder it is to leave. This means that even if they treat you badly, you are more likely to either let them know and sort it out or just be angry but not change anything because ‘it’s too much hassle’.
The Inconvenient Truth
People fall for this all the time.
They believe that by having business banking and all other products and services with one bank that it will be easier to get a home loan or other facility. The truth is that unless you have borrowings of say $1M or more in business lending – you aren’t getting any special treatment.
Even then it’s marginal.
For most banks, their own residential mortgages are processed via a separate department with its own credit managers and processors. Having your business banker approach them doesn’t necessarily mean you will have the loan approved.
In addition, each bank has cut its staffing levels over the past 10 years due to the introduction of technology and processes that are meant to provide quicker and more efficient service. In reality it means that bankers are busier, with less staff and more compliance than ever.
How exactly will they have time to look after you?
So, who is in control?
The main reason for separating your banking requirements is to provide you with a greater degree of control in your everyday banking.
If you have ever had a rough patch, a bump in the road (like my credit-challenged friend) or even been forced to endure a massive downturn in business operations, you will know that cashflow is what keeps the doors open while you fix the issues that are causing you pain.
During these times, having control over what comes in and what goes out is paramount to managing your way to success, or at least recovery.
Regrettably, the downside of having all your income and loans with the one bank is that it is acutely aware of your situation.
Banks don’t understand your pain
Banks also have the ability to debit your accounts for loan payments, fees and charges without your input.
You might find that in your loan documentation there is a clause that lets them off-set your deposit funds against their loan to you.
I have seen clients experience some very difficult and almost crippling treatment from bankers that have the sole aim of keeping their facilities ‘in order’ while not addressing the real issue — helping their clients perform (and pay their bills).
Let’s face it, many bankers have never run a business and they just don’t have the experience to give you advice on what to do.
What they will do though is debit your business account for a loan payment and maybe not leave you enough for rent or wages.
Or do the same with your personal account regarding your home loan. You won’t even know about it until it’s happened and by then it’s too late. A bank can’t (or won’t) reverse the transfer because that would mean debiting a loan – and unless you have a redraw facility – that just cannot be done…. apparently.
Time to take back control?
The whole point of using the following ideas to separate your banking is to give you control over cashflow when you need it most.
Hopefully, you will never have to ‘juggle’ money around because of a downturn in business operations. But, if you do, at least you will be have the luxury of making the choice of which bills get paid first.
One of the objections to doing this is ‘fees’.
You might find that there are plenty of options with respect to accounts without fees.
Conditions like minimum balances or minimum deposits can take care of this. Of course, you can also explore simply having your main account with a building society or credit union that doesn’t have fees on the accounts.
If you explore enough options, then you might also find that some credit unions or building societies have cheaper interest rates than the major banks – the interest you save will most likely more than offset any extra fees you pay.
- Employed by someone else – PAYG Employee
- Home Ownership
- One Investment Property
BANK ONE — Salary
BANK TWO — Rental Income
BANK THREE — Home Loan
BANK FOUR — Investment Property Home Loan
The above structure allows for all income to be placed with one bank, while each of the property loans is with a separate bank. This structure will allow you to keep your income separated from each of the loans.
It really means that you are in control of your money coming in and that those banks that have your lending, cannot unilaterally access these funds.
- Business Owner
- Home Ownership
- Investment Property
- Commercial Premises
BANK ONE — Business Account
BANK TWO — Personal Drawings
BANK THREE — Home Loan
BANK FOUR — Investment Home Loan
BANK FIVE — Commercial Loan
BANK SIX — Investment Income
While having up to six different banks or financial institutions in your portfolio may seem complex and cumbersome, the use of internet banking can help this enormously.
The reality is that once you have set up your Home Loans and Commercial loans, you don’t really need to touch these accounts for some time. The remaining banks will be used to separate your business and personal dealings.
There is nothing complex or ‘secret’ here. It’s just basic structures and organisation to allow you to take back the control of your cashflow. It may appear difficult, however, it will be nothing compared to the difficulties you will face when you cannot access your cash.
Back to my credit-starved friend
Fortunately, my friend’s minor hiccup with the bank was resolved. However, it took over a fortnight to get to the bottom of the matter.
During that time, every service provider with an automatic direct debit linked to the company credit card (from insurance companies to internet hosts) either contacted her company to receive payment or canceled their service.
While these set-backs were also soon resolved, the time spent in overcoming these short-term obstacles was never recouped and the ‘distraction cost’ to the company owner (and main ‘breadwinner’) was also sorely felt.
There banks exist to make a profit. Don’t forget it. But that should never stop you taking control. Because there is only one person who can help you avoid getting nabbed.
Todd O’Neill is Managing Director of The Mardent Group, an Australian finance broking company that specialises in helping people buy businesses. Previously he worked for one of Australia’s big four banks and in the UK and Europe for high profile firms Accenture and The Industrial Bank of Japan.