May 3, 2005--The House Financial Services Committee passed a bill last Wednesday that would allow small businesses to earn interest on their checking accounts.

Called the Business Checking Freedom Act of 2005 (H.R. 1224), the bill was introduced by Rep. Sue Kelly (19th Dist.-N.Y.) and seeks to remedy a 1933 statute that prohibits banks from paying interest on business checking accounts.

The passage of the bill by the House Committee is just the first step towards the phasing out of interest-free business checking accounts. The bill is expected to be taken up on the House floor in a few weeks.

During the last congressional session, the National Federation of Independent Business (NFIB) supported two pieces of legislation that included language that would allow banks to offer interest on business checking accounts. Though the House passed its version of the bill, the Senate never acted on it.

The NFIB expects the House to pass the bill this time around as well but is unsure of its ability to make it through the Senate.

Since 1933, a statute has forbidden payment of interest on business checking accounts. The rule has had the greatest impact on small businesses, forcing small business owners to choose between non-interest bearing accounts and more costly sweep accounts. Sweep accounts require higher minimum balances, in many cases, of about $25,000.

"Most small businesses don't qualify for sweep accounts, so they are forced to use the non-interest business checking account," said Patrick Lyden, manager, legislative affairs, NFIB. "We believe that with the passage of this law, any interest that small businesses can earn will help them."

Lyden said that though many large banks are not in favor of offering interest on business checking accounts, the passage of this bill might help small and community banks offer this service to help build relationships with their clients.

A large number of NFIB's members are in support of the legislation. An informal poll of its members showed that nearly 86% said that "they're tired of this cumbersome regulation" and would like to have a "level-playing field" when it comes to business checking.

"This legislative fossil invokes all of the images of the Great Depression -- decreasing business activity, falling prices and unemployment. But that is a far cry from the way folks characterize the very people affected by this legislation -- today's small-business owners," said NFIB Executive Vice President of Public Policy Dan Danner. "It is time for the small businesses that are growing and shaping our economy to have the freedom to operate in a banking environment that rewards their strength, rather than stifles it."