Ah, yes, now for that heady moment as an entrepreneur, the one many people treat with little priority, but one that we stress as ultra critical to your future – choosing and managing a relationship with a financial institution.
One of the most important relationships you can have as a small business owner is the one you build with your bank. Choosing the optimal bank can save you from unnecessary fees, mismatched needs and services, and other financial headaches.
There are plenty of banks out there, local, regional and national in scope, which will compete for your business. Below is a hit list of factors to consider when making your selection of the ideal banking provider.
Fees
Everyone tries to avoid banking fees with their personal accounts, and you should do the same with your business checking account.
To get to the bottom line about fees for a business account, dive right into the fine print. That’s where you’ll find all the gritty details about what happens to you, your account and why.
Complicating matters is the fact that every bank takes a different approach, so it’s difficult to establish an apples to apples comparison. But press on! Look for those fees that might be assessed for insufficient funds, or those monthly service fees, or costs for simply opening the account.
Learn the rates of several banks and that way you can shop around and find out the arrangement that works best for your venture. A good thermometer of what you can expect from a bank is your first book of checks, which should be free of charge. If not, sound the alarms.
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Use the threat of competition to get lower fees.
No-fee checking accounts and overdraft protection can help you in the long run. But it’s no secret that banks are fee-happy. They thrive on the revenue they make by charging you miscellaneous fees.
To counteract the “fee burden,” shop around before choosing a bank and find one that charges the least. And if you already have a bank but aren’t seeing a good offering from them, then take your business down the street, or at least threaten to. Loyalty has its limits and laziness has no role when it comes to keeping the operating costs of your business to a minimum. In the final analysis, these pennies add up and can mean the difference between having a profit margin or none at all.
Interest-Bearing Accounts
For a small business, having liquidity in your accounts is important. You may need regular access to funds, depending on the status of your cash-flow forecast. But at the same time, you want to gain as much interest as possible on the money sitting in your accounts. There are a few options at your disposal:
Interest-bearing checking accounts
These accounts offer you the highest liquidity, though they are at the lowest interest yield, usually less than one percent. Depending on your bank, they may also require that you hold a minimum monthly balance.
Interest-bearing savings accounts
Often attached to checking, and also called money market deposit accounts, they offer higher yields which can fall in the four-percent range. However, you might have to move funds from these into your operating checking accounts to pay off debts.
Sweep accounts
This is the combination of two accounts, where one serves as your operational funds and the other accrues interest. To get started, you would set up a checking account or similar fund. Money deposited after a certain point is then deposited into your separate account that earns higher interest. These do normally always require a minimum balance, though, and oftentimes there are associated fees.
Short-term CDs and other investments
These options will provide you with the highest interest rate but the least liquidity. You put funds into a CD or other vehicle for a set period of time, from weeks to years, without access. This option is good for a business owner who isn’t as strapped for available cash.
Online Banking
Once you’ve identified the correct types of accounts for your business, it’s a good idea to manage them online. Paying and dealing with transactions online gives you the benefit of moving your money more quickly than through the old standard method – sending checks via snail mail. Online banking is also convenient when it’s necessary to move money from account to account, as most banks allow you to transfer funds within their institution instantaneously.
Many banks will also notify you of pending transactions, so that you have time to enter money into an account if it looks as though you’re going to be short of funds. The same goes for incoming electronic deposits and wire transfers.
Nearly all banks give you the ability to pay your bills on the Internet. This can also save you the costs of postage and time. However, some banks may charge fees for such services, so make sure the time savings are worth those costs. Many vendors and creditors also offer online payments, at no extra charge.
As we advocated in Step 4, most online banking services also provide a link or downloadable document compatible with common accounting software or can at least transfer it into a spreadsheet. This saves you time that would otherwise have to be spent individually inputting transactions on your part or on your bookkeeper’s part.
Other features
Overdraft protection
Having this feature on your checking account can save you money and a vendor relationship. Overdraft protection can save you $35 to $50 fees on returned checks and help save your credit if a payment to a vendor is impacted. Sure, your bank will charge a fee – about $10 is reasonable – but it’s better than the alternative outcome. Additionally, some institutions will let savings or other accounts cover any shortfalls that come up in your checking account.
Business credit cards
You shouldn’t automatically accept a business credit card from your banking institution. There may be other rates or offers out there that are more beneficial. However, when opening a new account, banks will perform a credit check and oftentimes pre-approve you for one, which is helpful if it turns out to be the card you want.
Lines of Credit
Banks require some kind of asset or guarantee, typically, before providing a line of credit. Expect to be a personal guarantor of any such credit line or to promise business assets against this form of credit.
Consolidate accounts
It’ll probably save you time and help you avoid fees if your personal and business accounts are with the same bank. This way you can easily and cheaply transfer funds between the two. Assuming your venture meets your expectations and generates profits, you just click a few online buttons and voila, you’re headed for the Bahamas.
