How to choose the best checking account for a small business

In September 20, 2016

Best Checking Accounts for Small Business

For every thriving small business, there comes a time when opening a business checking account makes sense. It’s an easy way to bundle financial transactions together for accounting and tax purposes while separating it from personal finances. Mentally, it’s a bit like staking a flag into the dirt on a mountain peak, stating “I am serious about the success of this business!” It’s a declaration of intent.

Even more than that, what seems a simple and straightforward decision–where to open the account–has a deeper impact on a business than most realize; one that stretches far beyond fee structures and location.

Small Steps Lead to Bigger Relationships

When someone applies for a business loan, lending decisions aren’t entirely based on debt-to-income ratio, projected revenue and other standard criteria. Numbers matter, of course, but so does the perception of those individuals at the bank who make the credit decision. Their opinions carry great influence.

Beyond creditworthiness, they’re looking to understand stability and behavior of those running the business. A history of trust and responsible banking behavior with their bank gives them a clear picture of what they can expect from you in the future, along with opportunities to learn more about your business.

A business checking account creates that history.

It gives them insight into your business banking trends, operational habits and cash flow, which a personal banking history or statements of business checking accounts at other banks can’t accomplish in quite the same way.

It also allows them to personally meet and interact with you, building a personal one-on-one relationship over time.

These things all become important later on, when it’s time to apply for business loans. If you don’t have a relationship established by using other business products, such as a business checking account, you’re missing that foundation and forcing them to rely only on the numbers.

And if it’s a loan decision that balances right on the cusp of approval versus denial? That relationship (or lack of one) can be a deciding factor as they measure risk against their desire to loan money.

A solid relationship also opens the door for lower interest rates and fees based on the volume of business you’re doing with them.

Like Any Business, Banks Specialize

Banks aren’t government entities–they are a business regulated  by the government. Like any other business, they need to generate revenue. In today’s world of economic recovery, many banks offer both consumer and commercial services, but the truth is that they specialize. They’re either stronger in consumer or business banking.

This truth isn’t so important on the consumer side, where loan amounts tend to be smaller and products simpler–but it’s essential for business. If you’re seeking a loan upwards of $250,000 or even into the millions, details make a huge difference. Who offers the best rates and strongest terms on small business loans? Who can create a customized solution that works perfectly with your needs, versus a preset loan package that doesn’t quite fit? Who gets commercial real estate, knows the developers and has robust knowledge of the local business community? Typically a commercial bank, not a consumer one.

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Plus, a bank’s rates align with their specialty, with higher rates on products they don’t really “want” to offer. Most of their revenue comes from their area of specialization. It’s important to select a bank that resonates with the long-term needs of the business.

If you open a business checking account at a bank that specializes in consumer lending, their area of specialty might not seem like a big deal. It’s just a checking account. However, a year or ten later, you might be ready for a large business loan to fund construction or a commercial mortgage, only to find out that your bank doesn’t make those kinds of loans, can’t connect you with the right resources, or doesn’t have the experience to handle what you need. What seemed like a good fit suddenly isn’t.

Not only are you less likely to be approved because you’re seeking a product they aren’t all that interested in funding, but you’ve invested time building a business relationship that is unable to deliver on your needs.

You’ve lost the longer-term payoff that building a relationship with the right bank could deliver, and find yourself starting over with a different bank and a new relationship.

It’s important to build a business banking relationship with one whose specialty dovetails with your specific business needs and future goals.

But What About Relationship Pricing?

It’s not only history and specialty that matter. Over the last few years, banks have increasingly gravitated to “relationship pricing” intended to build bank revenue by capturing a larger slice of business from each customer. The more bank products used for personal banking, the more a bank is willing to invest back in that customer with discounts and packages designed to create an even stronger relationship with that client.

It’s far more cost effective to grow revenue from existing customers than it is to acquire new ones.

For example, you might receive an extra quarter of a percent off your auto loan interest if you’re a mortgage holder, and another if you have direct deposit of your paychecks, or receive waived fees when you add a Certificate of Deposit or Money Market to your account. It’s extremely common on the personal banking side and an attractive incentive.

But should this entice you to let the same bank handle your business banking needs? The long-term cost of what you lose by going with the wrong bank can far outweigh the immediate savings on fees or interest. It’s important to consider both.

Consumer-based relationship pricing won’t help if the bank can’t deliver the type of business funding you require.

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It’s important to keep both short- and long-term needs of the business in mind as you move forward evaluating where to open your business checking account.

So how do you find out about a bank’s area of specialty and any incentives they might offer for business relationship banking? Just ask. It’s in the interest of both parties to be transparent, but they don’t always discuss these things if you don’t ask the questions. 

 

 

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