Last Updated Jun 19, 2007 2:44 PM EDT
Anyone running a business appreciates the need for a bank account to pay bills and deposit receipts. But banks can help your business in other ways, too. They provide a range of services, such as overdrafts, term loans, and equity funding, as well as financial services like insurance and pensions. This article explains how to choose the best bank for you and looks at some of the services these institutions can offer.
Banking is intensely competitive nowadays, free of many regulations that once restricted the services they offered and where they could offer them. So it pays to gather as much information as possible about what banks can do for your business. All major banks have customer charters, or codes of practice that fully detail their fees, so you should be able to estimate the likely cost to your business. Most banks offer incentives for new customers, too; for example, free banking during the first 12 months; however, these incentives should be regarded as factors only if the decision between banks is otherwise marginal. Most businesses require a loan or overdraft protection at some point in their development; so ask the banks you're considering about terms, collateral and procedures before deciding where to open your business account.
Banking relationships are at least as critical as any other, especially if problems arise or early revenues projections aren't reached. Talking directly to the manager of any bank you're considering will be a worthwhile conversation. You also should seek advice and recommendations from professionals and small businesses in the same locale to help find a bank with a good track record. Your small business adviser or lawyer is a fine source. In some communities, retired executive corps may offer free consulting services worth tapping.
Opening a business bank account is pretty straightforward and not much different from opening any other kind of bank account. Even so, be prepared to provide appropriate identification and to outline your business plan and expected activities. This will help a bank to determine the best kind of account you need, number of checks, deposit slips and other routine supplies. Bank accounts can generally be opened with deposits in a specified amount, often as little as $500. If you are seeking a loan, banks can often give very fast answers, especially if you need less than $5,000. But also be prepared to answer standard inquiries about your credit history and what you can offer as collateral for a loan.
There are two main kinds of loan: short-term and long-term. Generally, a short-term loan has a maturity of up to one year. Types of short-term loans include: working capital loans, accounts receivable loans, and other lines of credit. Long-term loans generally have a maturity time of greater than one year but typically less than 10 years, although real estate or equipment loans may have a maturity of 25 years. Long-term loans are used for major business expenses, such as buying a piece of property, construction, furniture, vehicles, or even financing a new product or service.
A loan is ideal for finance the purchase fixed assets, such as a piece of machinery, office equipment, a building—something that a business expects to use for a long time. The loan term will be geared to the expected working life of the asset being purchased. The interest rate may be fixed, which helps with budgeting for repayment and protects the business cash flow should interest rates rise. Loans with variable rates are also available. Banks can offer insurance to cover any disruptions to repayments, and loans can be linked to an endowment or pension policy, with life and disability coverage also available. Ask the bank to confirm the loan terms and conditions in writing and analyze them carefully before proceeding.
When they review a loan request, banks may require a written loan proposal. This should include general information, such as: business name, names of its principals, business address, purpose of the loan, and exact amount needed. You also should include a business plan, a management profile, a marketing plan, and perhaps some of your personal financial information.
Few banks will provide an unsecured loan to a business. They will normally expect a business to designate something to act as security (collateral) against the loan, property, for example. Or, the bank may ask the directors of a business to provide personal guarantees for the loan.
Banks provide numerous other services, too, but traditionally charge for them on an "as needed" basis. However, competition can prompt banks to offer some of these services for free; it all depends on market conditions, and how badly a bank wants your business. Such services can make your banking much more flexible. For example:
- Open credit arrangements enable a business to withdraw cash regularly from a branch of the bank other than the one holding the account
- Credit and/or debit cards can be issued for multiple use, and statements can be broken down to itemize expenditures
- Electronic funds transfer enables a business to transfer money from account to another at another branch or bank on the same day
Banks can help make it easier for a business to deposit receipts and pay bills. For example:
- Night safes enable a business to deposit cash or checks before or after normal banking hours; there is usually a standard quarterly charge plus a per-item charge
- Banker's references are inquiries made on behalf of a business and review the creditworthiness and history of its suppliers and customers
- Stop-check services instruct the bank not to pay a check that already has been issued
- Cashier's checks are similar to regular checks, but are drawn from the head office of the business's bank and thus guarantee payment
Online banking services are increasingly available, and allow businesses to deal with a bank via the Internet—at any time. These services allow instant access to information about accounts, saving both time and paperwork. It also means a business can integrate its internal computerized account system more efficiently with that of its bank. Telephone banking is another common feature many banks offer. It, too, can be used to check accounts and payments, transfer funds and pay bills whenever a business wants to. Some banks even offer an online demonstration of how Internet banking works.
Many banks offer a range of international trade services for businesses trading in overseas markets with suppliers or customers who are based abroad. The systems and services in place help make it easier for businesses to deal with various exchange rates and the impact of swings in the values of major currencies. You may also be able to ask for international payment services.
To meet legal requirements and to ensure that the business is covered for unforeseen events, businesses usually require insurance protection. The banks all have arrangements or partnerships to provide whatever is appropriate. They can also help with life insurance policies, pensions, and personal savings, if required. Linked savings accounts with competitive interest rates can help your business make the most of surplus funds, while reserve accounts allow money to be put aside for taxes and working capital.
Many banks even offer free counseling to new businesses to help them identify potential difficulties and suggest new credit lines and services that may be useful. Most major banks publish literature on starting a business and offer comprehensive information services.
Just as you expect efficient, helpful service from your bank, your bank also has expectations of you. Banks do not like surprises, so keep them well informed, particularly if you have a loan. If you think that your requirements may change, give the bank ample notice. Do all you can to meet all the requirements of loan agreements. The same goes for any agreements covering your accounts. A bank will be far more likely to respond positively if, say, you need to borrow more money or renegotiate repayment terms. Once your business is up and running, send the bank a copy of your annual accounts each year. If you have a loan, this may be required. Even if you don't, it may help if you think you may need a loan at some point.
The Federal Deposit Insurance Corporation's (FDIC) mission is to maintain both the stability of and public confidence in the nation's financial system. To achieve this goal, the FDIC was created to insure deposits and promote safe and sound banking practices. Each depositor is insured up to $100,000. To see if your bank is insured, visit the FDIC Web site.
Watch out for hidden charges, especially. The costs can add up, especially if you're a new business. Newcomers are often surprised by the range of charges imposed by the bank, especially since individual customers receive so many services for free.
Mergers, consolidations and divestitures are commonplace now that banks are free of many regulations. Businesses that don't keep up with them do so at their peril. Credit cards systems and services, in particular, are bought, sold and transferred. This can mean sudden changes in terms, and that can have an sudden impact on your business, too.
Alterowitz, Ralph and Jon Zonderman.
InvestorGuide's Considerations While Choosing A Bank: www.investorguide.com