Unless you plan on putting cash under the mattress or trading in Bitcoins, your business is going to need at least one bank. The good news is, there are thousands of them and they are all looking to snag your business for most of your core banking needs. The bad news is, for lending products specifically, you will likely need to get creative.
Banking has always been tough for small businesses, and the 2008 economic collapse created even more of a crunch. We're now recovering and with that, banks are offering up better terms and non-traditional options are emerging. Here's an essential guide to navigating through this new world.
How to shop for a bank
Core operational services like checking accounts, deposits and online bill payments are best served by a traditional bank. Thousands of banks all around the country would love the opportunity to hold your business's money. This means a little research can go a long way to finding the right bank.
Before you start shopping around, think about your specific needs and priorities. How much money will be moving in and out of your account on a monthly basis? How many checks will you write? Do you need online payments, a lockbox, or face-to-face service?
Banks can be very nuanced about how they structure their fees and prices, so make sure you are comparing apples to apples, as well as focusing on what you need. One bank might have an impressive global ATM network, but if you are not a heavy traveler, there's no reason to factor this benefit into your decision.
Do a bit of shopping around, break down bank offerings on a spreadsheet, narrow your options down to five, call each bank to suss out its customer service styles and confirm specific information such as additional services, fee structures and interest rates. From here, you can make the best decision for your needs.
How to manage cash
As a small business owner, you're always striving for that moment when the extra cash starts to pile up. But now you need to find the optimal way to make the most of your profits. One bank may serve your basic needs, but another may be better suited to handle your investments.
The main question is how much do you need to invest in order to have a banktake yourcall?
The larger the institution, the more dough you will need to have. For smaller businesses looking to invest less than the mid-six digits amounts, a regional bank or local credit union will likely give you the best service and options, such as high interest savings or money market accounts.
Consider treasury securities if you are able to part with your money for a set period of time. Certificates of Deposit (CDs) are available in any denomination, even for terms as short as 30 to 60 days (keep in mind, the longer the investment period, the higher the yield). One strategy is to ladder your CDs by purchasing 30-day, 60-day and 90-day CDs; that way you'll be able to take advantage of the higher interest of the longer term, but are always just 30 days away from extra cash should you need it.
No matter what kind of treasury management product you choose, be sure to understand the minimum deposit requirements, interest rates and penalties for early withdrawal.
How to secure a loan
Restricted access to lending products to help manage cash flow is one of the top reasons small businesses go under. No matter why you need it, finding extra cash is the hardest part of the small business banking relationship. It's easy to find a bank willing to take money, but it's not so easy to find one willing to loan it out.
In general, larger financial institutions look for larger, cash-flow positive businesses and aren't interested in lending money to small- to mid-sized business customers. If you have a solid business with a lengthy financial history, it's likely you can get a reasonably priced loan from a major or regional financial institution. The key here is to compare interest rates and other terms such as penalties for late payments.
However, if your business is just starting out or you don't qualify for a traditional bank loan, there are alternatives.
Online small business lending services like OnDeck Capital and Kabbage can be a strong option for small businesses. They typically carry a higher interest rate than a bank, but are getting creative to get the right lending product into a small business when they need it. There are also merchant cash advance options, like Fundbox, or a receivables exchange. In some cases, such as retail, contracting and other big-ticket services, it can make sense to offer financing for the customer directly.
Keep in mind that while banks are tightly regulated entities, many alternative platforms are not. Be sure to spend the time doing your homework and carefully reviewing any contracts before signing anything.