Starting up your own small business is a very exciting time. You’ve found something that you’re passionate about and you can’t wait to share it with the rest of the world.
But you might not expect that a big part of starting your small business is choosing a bank.
So what makes a bank the best bank for small business?
While it might seem like a simple task, making this choice involves a lot more than simply going to your nearest branch and opening up a checking account. There are a number of different factors you need to consider, particularly what services your potential bank offers.
On top of that, small business owners are often presented with the challenge of obtaining financing with certain banks.
Having a small business bank account with the right bank is essential. Not only does it keep your business finances separate from your personal finances (allowing you to keep track of where you stand with each), it helps your business to run more smoothly.
But with so many different types of banks out there, how do you know which one to choose? Here is a guide to help you choose the best bank for your small business.
In an ideal world, you would be able to easily find a bank that provides you with all of the features you need to run your business perfectly. You could have a small business checking account with no minimum balances, no monthly fees, and unlimited transactions.
That same bank would offer great low interest loans, a small business credit card with all kinds of rewards, and a whole bunch of other essential services that you need. In the real world, however, you often need to make concessions. Many banks have fees associated with their small business checking accounts and there are transaction limits.
Different banks offer different types of loans to different types of businesses. The rewards associated with many types of small business credit cards may not be exactly what you’re looking for.
And not all small businesses offer the different types of services that your small business needs. When choosing the best bank for your small business, there are several factors that you will first need to consider.
When you look at a bank, take a closer look at their checking options. While a bank may seem to have numerous options for small businesses, the options that make the most sense for your needs may be limited to only one or two.
You should also take a close look at the fees and minimum balance requirements. For instance, there may be fees for replacing a debit card, overdrawing your account, withdrawing money from an ATM that is not associated with your bank, and so on.
Businesses have many more transactions than regular customers. It also costs banks money for every transaction. Because of this, most banks will have limits on the number of transactions you can make.
This can include anything from deposits in person, ATM deposits, electronic transfers, cash deposits, and more. Once you hit your limit, fees may be applied for additional transactions (although not necessarily on all types of transactions).
You will need to look at the number of transactions you make during a given statement period and if you expect those transactions to increase over time.
Small businesses sometimes require loans, whether it’s for new equipment, more working capital to increase products and services, to open a new location, or something else. There are a multitude of different types of loans to help you meet your specific needs, including lines of credit, term loans, invoice financing, small business administration loans, and more.
While having a bank that offers numerous loans gives you more options, it’s more important that the bank offer the types of loans you need. It is often even better if you are able to get the loans you need from the bank you already have a small business checking account with, as you are likely to pay less in interest.
Another consideration when choosing the best bank for your small business is their relationship with the Small Business Administration (SBA). The SBA works with certain banks to provide loans to small business owners like you.
Just as important as the rates and fees is simply getting approved for the loan. That can be a challenge for a small business, especially if it’s run as sole proprietorship. Banks that offer SBA loans are often more willing to approve them for sole proprietors and other small business owners.
Even with an SBA loan, you will need to meet certain requirements. Here are some important ones:
Credit score Banks generally prefer to offer their low-rate business loans to borrowers with credit scores above 680.
Time in business How long your doors have been open matters to lenders. Typically, you need to have been in business at least one year to qualify for most online small-business loans and at least two years to qualify for most bank loans.
Revenue There’s an adage that says, “It takes money to make money.” Many times, it also takes money for someone to lend you money. Many banks typically want to see annual income between $50,000 to $250,000.
Making the payments Speaking of income, you’ll need to divert some of that to repay the loan. According to Suzanne Darden, a finance specialist at the Alabama Small Business Development Center. your total income should be at least 1.25 times your total expenses, including your new repayment amount.
Some quick math: Your business income is $10,000 a month and your expenses are $7,000. If you divide $10,000 by 1.25, you get $8,000. That means you can afford a $1,000 monthly loan payment.
Many small businesses need a credit card. Rather than using your personal credit card, it is important to have a specific card designed for small businesses. Some banks will offer 0% APR for a certain amount of time as an introductory offer while others will provide rewards after charging a certain amount (such as cash back).
Much like with a loan, having your small business credit card through the same bank where you have your small business checking account can often lead to less fees.
Different types of banks may offer a variety of different services. If you take credit and debit cards (as most small businesses do these days), merchant services are necessary.
You need to be able to process cards in person and online, and services are needed to move the funds from your customer’s account to your small business account.
Typically, banks that offer small business checking accounts will also offer these types of services, and having merchant services at the same bank as your checking account can mean lower checking account fees.
If you have employees, payroll is necessary. While you can take care of it yourself (or use a third-party provider), some banks will offer payroll services. These services include such things as calculating withholdings, filing tax forms, and issuing checks.
If you don’t want to handle payroll yourself, you may want to look into comparing the cost of these services through your bank to the cost of using an outside provider.
Many banks can integrate with popular accounting and tax software. This can make managing the business side of your small business easier and less time-consuming.
There are even some banks that offer other services, such as HSAs, tax services, and/or retirement accounts. If these services are important to you, you will need to see if the bank you want to have your business checking out at offers them.
If so, you will need to determine if they are worth the cost of convenience.
Even if you choose a business bank account from a brick-and-mortar branch right down the street, it may also offer some handy and convenient online tools. Many banks offer free online and mobile banking for deposits and online bill pay.
You may also find some that offer additional services, such as invoicing, online payments, and integrations with accounting and tax software.
Being the careful reader that you are, you’ve likely noticed several mentions in this article of various fees that banks can charge small business account holders. We’ll cover some of those again here, but we’ll also offer suggestions about how to avoid them or get them waived.
One way is to look for banks that offer free checking accounts. While you may not get all the services and features of other accounts, it can be a good option, especially if you don’t need a lot of bells and whistles.
Many banks also waive the fee if you make a minimum number of debit or credit card purchases each month, or keep a minimum daily balance in the account.
The minimum balance option is similar to what you might experience with your personal accounts, but the amount can be much higher, with an average daily balance of about $1,500.
Some banks do offer ATM fee reimbursements, but these can also come with a bigger monthly service fee or higher daily balance amounts. Still, depending on how you do your banking, having this feature may make sense.
Where your small business bank is located can play a role in the types of services it will offer and the fees it may charge.
Smaller local or regional banks often have an appreciation for small business banking. They also often have a better sense for the local economy and market conditions. If you’re looking for more one-to-one access and seeing familiar faces when you walk in the lobby, consider a small neighborhood bank.
Smaller banks may also be more flexible during tough times, such as covering overdrawn accounts without imposing stiff penalties.
On the other hand, larger banks can be more likely to issue corporate credit cards to small businesses, which can be used for financing.
If seeing your banker face-to-face isn’t as important, online banks, without physical locations, can make it easier and faster to open an account with fewer fees.
Of course, your personal preferences matter, too. Big banks are often more convenient and have more advanced technology (including 24/7 mobile banking, online banking, and remote check deposit).
They also tend to have more ATMs and branches available, meaning that you can deposit, withdraw, or speak to a representative more easily. However, larger banks tend to have higher fees, and you rarely ever deal with the same person.
On the other hand, smaller banks are all about the personal touch. They prefer to work on a more intimate level, and desire to build an actual relationship with their clients. Fees and balance requirements also tend to be smaller with small banks.
What’s more is that small banks tend to support local small businesses and tend to have greater flexibility when it comes to loans. Your personal preferences should be an important factor in the size of the bank you choose.
Opening a business bank account (just like applying for a loan) will require a credit check. If your credit isn’t all that great, it can make opening an account and applying for business loans more challenging.
It can also limit other services that the bank may offer as well. You may not qualify for overdraft protection and your fees may be higher. Having poor credit doesn’t mean opening a business bank account is impossible though.
Just because your credit is less than perfect, that doesn’t mean you’re out of luck. It just means you may have to do a little more shopping around.
Your personal credit matters when it comes to opening up a business bank account. If you have credit issues, it may be in your best interest to avoid setting your business as a sole proprietorship.
Doing so means that your business bank account is then linked to your personal financial status. In the event that you have any judgements and/or liens against you, your business bank account can then be seized.
Instead, it is recommended that you form a separate legal entity, such as an LLC or corporation. You will then need to get a tax identification number, which will help to identify your small business as an entirely separate tax paying entity from yourself.
You can then use your new business entity to open up your business bank account. Once you have the account, you can then use it to begin building your business credit. Even in the event that you have great credit, creating a separate entity is recommended to avoid business related credit inquiries from injuring your personal score.
This type of account is opened with a deposit. Once you have been in good standing (usually for at least one full year), the bank can then convert your secured account into a regular business account.
With a secured account, you are usually still able to set up merchant services should you require them. The major disadvantage, however, is that secured accounts often have higher fees associated with them.
These accounts give you a “second shot” at traditional banking, and are available for individuals as well as businesses. You are provided with a debit card, but you are unable to write checks.
A second chance account also may not convert to a standard business account or offer merchant services, so it is important that you read and understand the terms and conditions before using this option.
Large banks are more likely to require hold deposits or have higher fees, especially if you are a new customer and your credit is not great (if they approve the business account to begin with).
Local credit unions offer more personalized service and can provide your business with the individualized attention that it needs, which is especially critical in the early stages of your small business.
You’re finally ready to open your business bank account. But before you head to your chosen bank (or hop on the computer), you are going to need a few things to get you through the process:
If you are set up as a sole proprietorship, and your bank does not require an EIN, it is still a good idea to have one, as it can reduce your risk for identity theft.
Once you have all of your necessary documentation, it’s time to open up your business bank account. Your final choice is between heading to the branch to open the account in person or to do it online. Each option has its own advantages and disadvantages.
Opening the account in person at the branch gives you the opportunity to learn more about the products available to you. Additionally, you have the peace of mind that the account was opened securely. However, it does require you to take the time out of your schedule to go.
Opening the account online can save you valuable time. The downside is that your banking activities may be limited, and not all banks allow for opening an account online.
Ultimately, the choice is up to you.
OK, so you have a small business bank account open and your money nesting safely within it. Still, there may be risks to your liquid assets. Accidents can happen. Mistakes may be made. Errors do occur. And if your business is involved, you may be responsible for the damages.
This is especially important if you’re a sole proprietor (as they account for 73.2% of U.S. small businesses). A sole proprietor is personally responsible for all of the business’s debts and claims against it.
That means if you’re sued or your business owes money, both your business assets, such as your bank accounts, and your personal assets could be made available to settle claims or debts.
Business insurance can help protect your business from many risks, so even if there is an accident or a negligence claim, you’re not left holding the financial bag by yourself.
At Simply Business, we can help you understand what type of coverage you may need. And we'll find it for you from top insurance carriers. It’s fast and easy.
Plus, with general liability policies starting as low as $25.95/month,* it’s affordable to get the protection your business needs.
And just as with a bank, you can get things started online, or you can talk with one of our friendly insurance agents. They’ll be happy to help you find the right business insurance policy. They’re just a call away at 844-654-7272.
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So what is the best bank for small business? That’s kind of like asking, “What’s the best kind of business to open?” A lot of it depends on you and what best fits your needs and your style.
As a small business owner, you’ve put a lot of thought into what kind of business you want to build, how you want to run it, even what you want to call it. That’s good, because those things matter. So does choosing your business bank account.
While it might be tempting to just head to the closest bank and open up an account with them, choosing a bank for your small business involves a bit more work than that.
Choosing the best bank for you requires that you have a thorough understanding of what your business needs are and what the bank can offer you. Depending on your specific needs, finding the best banking services may require that you have more than one bank.
While it certainly is easier to have all of your banking needs taken care of by the same provider, it can be difficult to find one bank that can provide you with the best of every service.
You will have to determine what services are most important to you and what will ultimately save you the most money. In doing so, you will be able to help your small business succeed and grow.
I love writing about the small business experience because I happen to be a small business owner - I've had a freelance copywriting business for over 10 years. In addition to that, I also head up the content strategy here at Simply Business. Reach out if you have a great idea for an article or just want to say hi!
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated insurance carrier by AM Best. Harborway Insurance is a brand name of Harborway Insurance Agency, LLC, a licensed insurance producer in all 50 states and the District of Columbia. California license #6004217.