How to Choose the Right Bank for Your Small Business
From the very start, your business should be on the lookout for a supportive and reliable bank. Whether your needs are simple (a separate business checking account) or complex (a line of credit), finding the bank that fits your business's needs is crucial.
In making the decision, it is pertinent to consider not only your business's current needs, but its potential future aspirations. That's especially true if you're anticipating being in the market for a loan over the next few years. Because the bulk of small business loans come these days from smaller community banks, it is advisable to establish a good relationship with your bank before your business needs outside capital.
But that's just part of the equation. Before you start making any decisions, remember that all banks are different. We've compiled some guidelines to help you find one with the right stuff – from interest rates to investment products – for your business.
Dig Deeper: Financing a Small Business
Choosing the Right Bank: Knowing Your Needs
Before you start shopping around for a financial institution, consider why you need one in the first place. Are you looking for specialized services, such as investment help or a small business loan? You can search online for local banks that specialize in equipment loans or small business working capital
Consider also how much cash flow will be moving in and out of your business account. Is your "business" even a business yet? You will be required to have a business name and usually be registered with the state upon opening up a business banking account. San Francisco-based financial advisor Kathryn Amenta suggests using this rule of thumb: "Once someone is spending 20 hours a week on a project and counting on the revenue to make up as much as 50 percent of their personal income, it's definitely a business for financial and tax purposes," she says.
Some banks provide incentives to keep a certain amount deposited – and others offer services to make the most of your profits. If you don't already have a financial advisor who can help with investments and cash flow management, it might be wise to consider a bank that can offer those services. Certain institutions can even help you collect financial information in your industry. Otherwise, you would be wise to enlist an independent financial advisor to pinpoint your needs before choosing a bank.
If you're just starting out and think you only need a checking account to manage incoming payments from your clients and reliably handle outgoing checks, think again. What else might your small business need in the next 10 years? Might you be expanding and need a loan in the future? Finding a bank that could work with you on that is most important to focus on. "Free checking" is no longer an offer to make a decision based on.
Dig Deeper: Is Online Banking Right for You?
Choosing the Right Bank: Comparing Features
Once you know what you're looking for in a bank, comparing what banks offer in your area and worldwideis relatively simple. Search for banks that specialize in what you need, and call them to request specific information, including additional services, fee structures, and interest rates. Before setting up meetings with bankers, review the information, and create a list of questions.
If you fall in the category of just needing simple account services as an entrepreneur, you might take a look at the growing sector of online banks. When Elizabeth Potts Weinstein, an attorney and small business consultant, started her own business six years ago, she realized her priority was to have easy online access to her accounts – and most community banks she checked with didn't offer online banking. She went with a nationwide bank with an online banking system that fit her needs.
On the other hand, if location and face-to-face treatment is important to you, and easy access to deposits and cash is necessary, Potts Weinstein suggests: "Use a local bank with an extensive ATM network. Or, get into an institution that will rebate foreign ATM fees. But be realistic about the requirements for getting this done. Are you really going to provide the bank with ATM receipts?"
As you move closer to selecting a bank, pay close attention to the fees. The fee structure for business checking can be significantly different – and much higher – than those assessed by a bank on a personal checking account. Some banks will also charge small businesses for online banking services, even though they do not charge individuals.
Remember, as a potential customer, you have the right to ask for exactly what you need. If that's free online banking, make that clear to your community bank manager. Or, if you're willing to pay for certain services, but need a representative to be available on a monthly basis to counsel you, let them know that upfront.
Dig Deeper: Scoping Out Start-up Banks
Choosing the Right Bank: Size Matters, Especially for Lending
At some point in your entrepreneurial life, chances are you're going to need to borrow money in order to get your business off the ground or keep it going strong. And if that point is now, when so many banks are clamping down on credit, the task may seem near insurmountable. The good news is, while they may be fewer and farther between, there are still banks out there that believe in entrepreneurs like you-and you'll find them here in our rankings of the best small business banks
In the post-credit crisis economy, there's a lot of movement toward small banks – especially in the small business world. Research shows that small banks are more likely than large institutions to issue loans to businesses in their community. In fact, though small and midsize banks control only 22 percent of all bank assets, they account for 54 percent of small business lending, according to Federal Deposit Insurance Company data from the third quarter of 2009. (See charts here.)
The little local bank down Main Street will also offer you the level of human interaction you won't find elsehwere. Part of a community bank's mission is to help the neighborhood thrive. If you're principally looking for a lender, creating a relationship with a small bank could be mutually beneficial.
That said, you should still shop around for loan rates when choosing a bank. Big banks can sometimes offer lower rates. They are more bureaucratic, however, and iif your business is online or might not fit into a classic industry category, getting a great rate from a big bank might be difficult.
"Some of us have these weird online businesses that don't fit into a slot – we're not a dry cleaner, for instance," Potts Weinstein says. "That's when you need to find someone, a human, who can make exceptions to the rules. A really big bank just won't do that."
As her business grew, Potts Weinstein found it time to transition from a large lender to a small one that had the online services she needed, but also could work with her financial needs on a personal basis.
"I'm getting to the point where I'm going to plan a large event, so I'm going to need help with cash flow," she said. "I need a bank that's going to be able to work with me on it, and be flexible."
There's also increasing political support for small businesses to partner with small banks. In addition to federal Small Business Association loan incentives, some experts think small businesses could have a hand in solving the credit crunch by simply changing their banking habits – and putting their money in small banks. The Institute for Local Self-Reliance's New Rules Project has teamed up with Move Your Money, a new initiative by the Huffington Post and Roosevelt Institute to provide resources to companies in switching their business to community banks.
Dig Deeper: Tapping Community Banks
Choosing the Right Bank: Remembering to Reevaluate
Once you have a bank that works for your business, don't forget to shop around periodically. It's natural to take time to re-evaluate your business's financial needs every time your bank changes something about its service – whether it is bumping up a loan interest rate or adding on a periodic finance charge. Even if the customers service is satisfactory and consistent, most experts recommend reevaluating your financial needs every few years.
Your business's needs will likely change as it grows from infancy into a midsize company, or perhaps morphs from a physical storefront to an online shop (or vice versa.) As an owner you need to both make your bank aware of changing needs and keep your business with a financial institution that will help your business thrive at every step.
Alternatively, if you like certain services your bank provides, but need additional services, you can consider maintaining accounts at different banks. Of course, doing so might require more intense internal accounting systems, so if your business is growing more complex financially, it might be time to consider hiring a CFO, an accounts payable or accounts receivable professional, a bookkeeper, or part-time CFO, which is what Amenta recommends. A part-time CFO can step in quarterly or once a month if your needs are more strategic in nature. "They are people who have reputable business and finance training and now make business their livelihood," Amenta says. "They have a number of clients, and can come in once a month to oversee what's going on financially."
Another type of account to consider: Many thriving online companies use separate merchant accounts to manage online business. Merchant accounts tend to come with numerous fees associated with transactions, processing, and monthly usage, so research these carefully before setting up one.
Choosing the Right Bank: Final Thoughts
A good bank can prove to be an invaluable partner to a small business, not only helping its owner to borrow capital, but also working with him or her to plan for the future and assure potential customers of the business's stability and credibility. Put as much effort into finding the right bank—and nurturing your relationship with your banker—as you would put into landing a big customer or hiring a new member of your management team.
Choosing the Right Bank for Your Small Business: Additional Resources
Grow Up! Strategies: The 7 Legal & Financial Strategies You Need to Up-Level Your Small Business, by Elizabeth Potts Weinstein. Love Your Life Publishing, 2008.
Small Business Cash Flow: Strategies for Making Your Business a Financial Success, by Denise O'Berry. Wiley, 2006.
Small Business Financial Management Kit For Dummies, by Tage C. Tracy CPA and John A. Tracy. For Dummies, 2007.
Financing Your Small Business: From SBA Loans and Credit Cards to Common Stock and Partnership Interests, by James E. Burk. Sourcebooks, 2006.
Read all of Inc.com's articles on small business money and finance here.
CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer
Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.