The ins and outs of small business bank accounts: what you need to know before making a choice

Managing cash is a challenge.

WalletHub’s 2019 Small Business Owner Survey found that managing cash flow was the second biggest frustration for business owners.

As your business grows, you need to decide on a number of products and services, including a business bank account. Your banking involves more than just free checking. You need to establish a relationship with a banker who understands your business, and who can help your business grow.

Establish a Relationship

When you’re considering a business banking relationship, start with the end in mind.

You need a partner who can serve your banking needs as your small business expands. Over time, you may need a line of credit for operations, or a long-term loan to purchase assets.

Small business owners must build trust with a banker, so that the bank is willing to add services and lend money. Loan approval requires more than a set of financial statements. Ultimately, a loan officer must know you, and trust that you’ll repay the loan on time.

Your banker needs to understand the unique challenges of your industry.

Industry knowledge

The banker must understand how businesses in your industry operate. As an example, meet Patty, who owns Family Grocery, a business that operates five grocery stores. Patty’s bank recently merged with a large competitor, and the level of personal service isn’t what it used to be.

Patty is considering a move to a new bank that can provide better service. The key contact will be the bank’s loan officer, who must understand several factors regarding Patty’s business.

Profit margins

Grocery stores typically operate on a 1 to 2% profit margin, but many grocery companies grow sales and earnings for decades. Family Grocery consistently generates a 3% profit, which is higher than the industry average. An inexperienced lender might be concerned about such a low profit margin, but Family Grocery produces good results for its industry.

Sales cycle

Grocery stores have relatively low profit margins, but short sales cycles. Consumers buy the same groceries from Family Grocery month after month, and that generates consistent sales. Patty’s business generates the cash flow necessary to make payments on a loan.

Products with a long sales cycle generate inconsistent sales results. A tech company selling an expensive software product may require 18 months- or years- to make a sale. Sales and profits can vary greatly from one month to the next.

Finding repeat customers

How do businesses find and retain customers in your industry?

The answer has a great deal to do with long-term profitability.

Customer acquisition cost (CAC) refers to the cost required to convince a customer to buy your product, and successful companies strive to constantly lower CAC. If you can build brand awareness, consumers are more likely to know and trust your business. If you like your iPhone, you’re more likely to purchase a new Apple product. Apple’s brand awareness allows them to spend less on marketing, and drive sales based on reputation.

Another important metric is monthly recurring revenue (MRR). This number represents the amount of revenue that your firm can expect every month. Again, grocery stores have a high level of MRR, along with companies that sell a product by subscription. Think about NetFlix or Disney+.

Family Grocery has a high level of MRR. The firm advertises using newspaper ads, billboards, mailers, and through social media. The company’s CAC is relatively low, however, because Family Grocery has great brand awareness in the community. Customers already know about Patty’s stores- they just need an extra push to become customers.

Work with an expert

When Patty meets with prospective loan officers, she asks about their experience working with grocery stores. Family Grocery performs well, and Patty needs a banker who understands her industry.

The new bank will also review the owner’s personal history, from a financial point of view.

Personal history

A business owner with prior success in an industry is more likely to succeed, and bankers value experience. Patty’s family has operated Family Grocery for 80 years, and she has personally managed the stores for 15 years. She knows the industry, and how to manage a profitable business.

Personal creditworthiness may also be a factor, particularly if you need a business loan down the road. How you handle personal finances is important to a loan officer. If you’re willing to move personal investment assets to the bank, you can build a stronger relationship.

Patty’s business success has allowed her to maintain a high personal credit score, and she has accumulated a large investment portfolio. Her personal financial history is a plus to a loan officer.

Think carefully about the services you need from your bank, and how your needs may change due to company growth. Find out if the bank works with companies of your size, and firms in your industry.

Many successful business owners are frustrated with their banking relationships. They manage profitable companies, but some banks are unwilling to provide loans to finance growth. Talk with the bank’s loan officer, and determine if they understand how you operate.

Banking Services

You may need a number of banking services to operate your business, and you need a bank that’s responsive.

You’re busy, and the fastest way to get your questions answered is to make a call or start a live chat session. Ask your bank about response times for customer service calls and live chat sessions. Is the online banking system easy to use?

Mobile banking is an important tool you need from your bank. You should be able to scan and deposit checks on a mobile device, and access all of your bank information using mobile.

Credit card usage is growing, and you need a bank that can process credit card data for your customers.

Credit card processing

Your business should accept credit cards at physical store locations, and for online purchases. Credit cards provide another payment option for customers, and credit card use is growing.

Customer preferences

Accepting credit cards will give you an advantage over small business competitors that don’t offer the card option. Your chances of getting a sale increase if you accept credit cards, and customers make bigger purchases using plastic.

  • 60% of U.S. consumers use credit cards over cash, according to a recent report by the Federal Reserve.
  • In a 2018 survey, payment processor TSYS asked 1,222 consumers which payment form they prefer. 26 percent selected credit cards, and only 14 percent specified a preference for using cash.
  • Despite the growing use of plastic over cash, a GoPayment survey discovered that more than half of U.S. small businesses—a staggering 55%—don’t accept credit card payments.

Your bank must be able to integrate with credit card processing suppliers such as QuickBooks. If the bank can’t provide the integration, you need to find another banking option.

How credit card payments work

Follow these steps to put a credit card processing system in place:

You need to set up a payment gateway. Your gateway facilitates transactions from a payment portal, which may be your website or point of sale terminals in a retail setting.

The credit card payments move from the payment portal to a processing entity, typically a bank.

Here’s what happens when your customer pays by credit card:

  • The transaction is approved by the processing entity
  • The dollars are posted to your company’s merchant account
  • Dollars in the merchant account are moved to your business bank account

Start the process by setting up a merchant account. These accounts include a setup fee that can range from $50 to $200. By setting up a merchant account, you avoid paying the higher fees that a third-party processor charges to process credit card payments.

To use your merchant account, you’ll pay a fee per transaction, or a monthly fee. If you have physical store locations, you’ll also need POS terminals.

A merchant account can be integrated with accounting software, and the combination offers some great features; You can create invoices automatically, offer a credit card payment option for invoices, accept payments by phone or through mobile credit card readers.

Best of all, the payment data and accounting activity is updated in real time.

Some businesses accept payment using ACH payments, but credit cards are becoming the preferred payment method for your customers. Your bank should be able to set up a credit card system quickly, and process payments at a reasonable cost.

To simplify your accounting, you should automate as many routine tasks as possible, including bill payment.

Automated bill payment

Your bank must be able to integrate your bank account with your accounting system, so you can set up automated payments to suppliers.

Make the effort to pay all of your suppliers electronically. Automated payments are tracked in your accounting software, and you’ll have a complete audit trail for each transaction.

Each purchase should require an approved purchase order (PO), and the PO must be compared to the actual goods or services provided by the supplier. Before you make an automated payment, review the PO and the supplier’s invoice. You can automate this entire process, and file the documentation electronically.

Paying by physical check increases the risk of fraud, and you’ll have to manage paper documentation. If you issue physical checks, the bank reconciliation process is more time-consuming. Work with a bank that provides reliable automation for bill payment.

Your bank must also provide integration tools to automate payroll.

Payroll processing

A small business must complete these steps to calculate payroll expenses and submit tax payments:

  1. Data collection : When an employee is hired, you need to collect information to withhold the proper amount of payroll taxes. Employers must withhold federal income tax, and may withhold dollars to pay for company-provided benefits. If, for example, you offer a retirement plan, a worker may want payroll dollars withheld and invested in the plan.
  2. Calculating net pay: The net amount of employee pay is the gross pay less tax withholdings, less any benefit payment withholdings. You’ll also calculate withholdings for Medicare and Social Insurance.
  3. Payments: You must pay each worker by check, or via direct deposit to a bank account.
  4. Reporting : A tax filing for federal tax and state tax withholdings must be submitted to the IRS and the state department of revenue. Retirement plan contributions, state unemployment payments, Medicare taxes, and Social Insurance taxes are reported to other entities.
  5. Withholding payments: All of the tax and benefit payments must be forwarded to the taxing authorities, retirement plan firms and other benefits providers.

Just as with bill payment, your bank must be able to integrate with your accounting software. In addition, banks need the ability to work with third-party payroll processors, such as Paychex or ADP.

If a bank can meet all of these requirements, it’s time to talk about fees and costs.

Fee structure

Banks are under pressure to reduce fees, due to customer expectations and improvements in technology. While bank fees for individuals may be relatively high, business owners can negotiate reasonable fees on transactions.

Typical bank costs include fees for ATM usage, checkwriting, paper statements, wire transfers, and a monthly maintenance fee.

Your banker wants to establish a long-term relationship with a business that is growing. Use that knowledge when you discuss fees and costs.

As you look for a bank to meet your long-term needs, you can also review the type of business accounts they offer. The type of small business checking account you choose will vary, depending on your needs and creditworthiness.

Comparing bank accounts for small business

Here are some factors to consider as you choose a bank account:

Annual percentage yield

To assess your bank account options, you need to understand the annual percentage yield (APY).

APY is the rate of return (interest) you earn on savings accounts, checking accounts, and certificates of deposit (CDs). The APY rate assumes that your interest is reinvested in the account, which means that interest compounds.

It’s important to understand APY, so that you can compare the interest rates offered on bank products.

Minimum balance

If you must keep a minimum account balance, cash management is more difficult.

The minimum balance reduces the amount of available cash in your account, and you’ll have to plan cash flow more carefully. The requirement may be stated as a minimum daily balance, or simply as a minimum balance requirement.

If you see any language regarding a minimum balance, ask the bank to explain how the required balance is calculated.

Fee structure

The type of fee charged is just as important as the dollar amount of each fee.

Many accounts charge a monthly fee, and you can compare the dollar amount charged by different banks. If the account charges transaction fees, pay close attention.

A growing business makes more deposits, writes more checks, and processes an increasing number of debit and credit transactions. Some businesses incur big transaction fees as the company grows. Make sure that you understand how fees are charged.

Many online banks- those without physical bank locations- offer low-cost account options. You can find online accounts that offer the same level of FDIC insurance provided by traditional, brick-and-mortar banks.

Here are the best bank accounts for small business.

Best small business bank accounts

The best account for your business will differ, based on your needs and preferences.

Best overall

Azlo provides an FDIC-insured online banking account for small businesses. You can pay suppliers and send invoices using the bank’s mobile app. Note, however, that Azlo cannot accept cash deposits, and does not process physical checks.

If your customers are comfortable with paying electronically and not using cash, Azlo is a good option.

Best no-fee checking account

NerdWallet ranks Axos Bank and BBVA as the two best checking accounts that don’t charge fees. Axos is primarily an online bank, while BBVA operates online and through bank branches.

Best accounts for online businesses

Capital One has a high level of brand awareness, due to the company’s extensive advertising campaign. The Spark checking account offers these features:

  • No monthly maintenance fees or any monthly transaction fees
  • No transaction limits
  • No minimum balance required

The Spark account is a convenient, low-cost option for online businesses.

Accounts for businesses with bad credit

Everyone makes mistakes, including business owners. If you have poor credit, you can still find a business bank account.

DoughRoller recommends several accounts, including the Wells Fargo Opportunity checking account. You’ll pay a $10 monthly fee, but the fee can be waived based on direct deposits, and your average balance.

Every business can find a bank account that fits the owner’s needs. Follow the steps below to open a business checking account.

What to do next

You need a bank that provides the services you need, and offers a checking account that works for you. Follow these steps to find your bank account:

  1. Determine what you need: Meet with your staff, think about your business processes, and decide on the banking services your firm needs.
  2. Ask for referrals: Ask business peers, accountants, and attorneys for a referral. A good banker is like finding a great auto repair shop. If you’re happy with the service, you’re more than willing to share the company name with other people.
  3. Have a discussion: Contact banks and have a conversation about your needs, and the services they provide. Your banking relationship is important, and you need to do more than simply check a website.
  4. Apply for an account: Most account applications can be completed online.
  5. Start banking: Once you’re approved, submit your opening deposit and start using the account.

Don’t hesitate to call your bank, once the account is opened. With proper communication, you can establish a great relationship with a bank that can support your business growth.

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