SME banking: everything you need to know

SMEs are the backbone of Britain – they account for 53% of nationwide turnover and 61% of jobs, according to a government report in October 2023. 

It’s amazing to think that such an important part of our economy is often treated disrespectfully by banks. No matter how amazed we might be, it’s the reality we’re in. The average SME struggles to get the kind of banking service and relationship it needs and deserves. 

We’ve written this article to sum up how banking can make life better for SMEs, dissect the current situation, and explore what options are out there for Britain’s small and medium enterprises. 

What is an SME? 

As we define it at Allica Bank, an SME is a business that’s been incorporated for at least one year, with between five and 250 employees. 

You’ll find plenty of definitions along similar lines elsewhere, but that’s how we separate SMEs from large enterprise business, as well as microbusinesses and sole traders. 

The importance of banking for SMEs 

It’s hard to imagine running a business without a bank account. In fact, limited companies are legally required to have their own bank account, separate from their directors’ personal accounts. 

SME banking doesn’t exist solely to give customers somewhere to send their payments, it’s also your way to:  

• Run payroll 

• Save for and pay your tax bills 

• Access helpful contacts and networking opportunities (if your bank offers a relationship manager) 

• Earn cashback on your spending and interest on your savings 

• Grow your business through finance (eg. a commercial mortgage or loan) 

No matter what kind of SME you run, you’re likely to spend a lot of time with your bank. A bank that understands the unique nature of SMEs and offers genuinely valuable support should be the bare minimum.

Banking challenges faced by SMEs 

Big banks tend to create business accounts that are either awkwardly repackaged versions of their retail (personal) current accounts or bespoke products for huge corporate customers. 

That puts SMEs in an awkward spot – their needs are too complex for a copy-and-paste approach, but they aren’t lucrative enough for a corporate account. As a result, they have to make do with imperfect options that don’t provide what they really need. 

SMEs need access to:  

• Fair fees and transaction limits 

• Bespoke financing (eg. industry-specific asset finance) 

• Competitive cashback rates and interest rates on savings 

• Non-standard payments like international transfers and bulk payments 

• Contacts and relationships within the bank who understand their business and locale 

 On top of that, SMEs are facing challenges with opening and maintaining accounts. The time taken to open new accounts can run into months and businesses are still facing the risk of being mistakenly or unjustifiably debanked. The government's Treasury Committee expressed concerns about this matter earlier this year.

Types of banking services for SMEs 

Business banking isn’t just about current accounts. There are a whole host of financial services and products you can access from banks that are good for your business. 

Current accounts 

Current accounts are the number one product SME owners will know about — they’re a legal obligation for limited companies, after all. 

Your business current account is the financial heart of your business. You use it to receive payments, pay suppliers, run payroll, and pay your taxes. 

Savings accounts 

If you’ve got cash going spare or that you don’t need to spend for a while, a business savings account is the place to store it. 

Savings accounts come in different forms, from instant access accounts to 95-day notice period accounts. They offer a range of interest rates, which can vary depending on the type of account and the amount you have to save, but they all put your money to work for you. 

Overdrafts 

An overdraft is what’s known as a revolving credit facility. It’s not like a loan, with a lump sum paid out to you and a monthly repayment schedule. Instead, it’s like a pot you can dip into and refill when you need. 

Overdrafts only come into action when your account balance drops below £0. You pay interest on the negative balance and cannot exceed your pre-agreed overdraft limit. 

If you have an unexpected expense or a cashflow issue, an overdraft can bridge the gap and keep everything moving without interruption. 

Asset finance 

Every business has assets, from smaller items like computers and tools to a fleet of vans and complex machinery. Without assets, you can’t run a business. 

If we follow that line of thinking, you can’t grow a business without eventually growing your assets. The problem is, they can be prohibitively expensive. Even if you have the cash to buy a particular asset, it’s a risk to tie up so much of your own money in buying it. 

This is why asset finance exists: to loan SMEs the money they need to buy new assets and keep progressing – without spending every penny in their account. 

Growth finance 

Closely connected to asset finance, growth finance exists to give SMEs the financial support they need to grow in other ways. This is a broad category, with SMEs using growth finance to: 

• Consolidate existing debts on more favourable terms 

• Fund mergers and acquisitions of competitors 

• Improve cashflow during a critical period 

• Support a management buyout 

There are lots of efforts that can be supported with growth finance, so it’s always worth talking to your bank about what they can offer under these terms. 

Commercial mortgage 

You might have the opportunity to buy your rented premises, you might be trying to expand your footprint, or you could even be a commercial landlord. Whatever your reasons for thinking about buying commercial property, it’s likely that you’re going to need a mortgage for it. 

The basics of commercial mortgages are no different to the residential mortgage you have on your home, but there are some differences to be aware of: 

• Shorter terms 

• Higher interest rates 

• Lower loan-to-value (LTV) ratio needed 

The process can also take longer than residential mortgages as commercial properties often need greater solicitor due diligence and valuation scrutiny.   

Payment services 

It would be nice if your SME only ever received money, but chances are you probably have to make regular payments as well.  

For some businesses, it’s a few direct debits each month. For others, it’s a complicated web of suppliers, staff and other expenses. Your bank really needs to be able to provide payments in the way you make them, which could be any combination of: 

• Bulk payments (eg paying all staff or suppliers on a set day) 

• BACS payments to other accounts (eg paying an invoice) 

• International transfers (eg paying a supplier in the EU) 

• CHAPS payments (these are usually extra-fast, high value payments.) 

And then there’s the fees to consider. Some banks will offer fee-free transfers, others will limit the number of fee-free payments you can make in a month and others will charge you for every payment made and received. A 20p cost for a transaction doesn’t sound like much, but if you send and receive 1,000 in a month, you’ll face £200 in bank fees. 

Banking support (relationship managers) 

One of the most valuable services banks offer SMEs is personalised, relationship-first support. Branch managers and relationship managers used to be in every bank on every high street, but they’ve steadily disappeared in the name of cost-cutting over the years. 

Today, you’re only likely to have a relationship manager if you meet strict criteria – which can depend on how many zeros you have at the end of your account balance. 

That is, however, unless you choose a bank that’s been designed to make business banking how it used to be, just better.

Choosing the right bank for SMEs 

Every SME is different, but the group as a whole shares plenty in common. The best banking for SMEs needs to be easy to use and access, whilst also being rewarding and reliable. 

When working out which bank to choose for your SME, think about comparing: 

• Interest rates on attached savings accounts 

• The costs and fees that come with the account 

• Reviews about customer service and support levels 

• A bank’s reputation, performance and general stability 

• Any features or products that are built specifically for SMEs 

• How digital their services are (there’s no right or wrong answer, only what suits you best) 

If you need a headstart, we’ve compared 13 bank accounts for SMEs available in 2024. 

The role of relationship managers in SME banking 

It used to be completely normal to have a named contact at your bank – somebody you could contact directly, who’d know your business and what you’ve got planned, to provide a personalised service.  

That’s just not the case for the vast majority of SMEs today. Even for a lot of large businesses, the level of support available is in short supply. 

The winds of change are blowing, though, and banks including Allica are trying to bring the personal touch back to business banking. 

Relationship managers can connect you with the support you need, even if you don’t know it exists. With their comprehensive knowledge of what the bank can provide, you’ve got somebody on your side who is looking out for your business.

Why SMEs choose Allica for their business banking 

In terms of relationship-led banking, Allica Bank is leading the way. We’ve built our bank from the ground up, with relationships at the heart of everything we do. 

Our Business Rewards Account for SMEs comes with no monthly fees, a 4.08% AER* (variable) integrated Savings Pot, minimum 1% cashback on all your spending, and a dedicated relationship manager to help your business grow. Some of these features are subject to eligibility requirements – check the account terms and conditions for more information. 

We aren’t the only option for SMEs and we don’t expect to be the right choice for every business. 

If you’re interested in finding out more, you can check out our current account webpage and even submit an initial application there. 

We also offer savings accounts, asset finance, growth finance and commercial mortgages. Whatever your business needs, we’ll work hard to provide it.

Banks can be a partner by your side 

Banking can be much more than some numbers on your screen. Done right, business banking can put more people in your corner, fighting for your goals and doing right by your business. 

The options are varied and there are pros and cons that come with every bank, but the real thing to keep in mind is that your bank should feel like a net-positive relationship for your SME. If you’re feeling frustrated by your bank, you shouldn’t have to settle for that. 

From day one, we built Allica Bank to be the best choice for SMEs across the nation. If you’re interested in banking with us, take a look at our current account or make a quick application now. 

Links were live and information was correct at the time of publishing.

Disclaimer: This is information – not financial advice or recommendation 

The content and materials featured in 'SME banking: everything you need to know' are for your information and education only, and are not intended to take into consideration any particular recipients’ financial situation. The product details and interest rates referred to are correct at the time of writing. 

The information does not constitute financial advice or recommendation and should not be considered as such. Allica Bank will not accept any liability for any loss, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.