Banking for Entrepreneurs

Small businesses make up 99.9 percent of all firms in the United States, with roughly 8 percent of those businesses being startups, according to data from the Small Business Administration. Estimates show that nearly 500,000 people start a small business each month.

If you’re thinking about joining this group of entrepreneurs and starting a small business of your own, there are a number of steps you’ll need to take to establish your company. Luckily, there are many resources to guide you on the forms to file with your state, how to apply for a federal tax identification number, etc.

What’s not often clear, however, is the best way to set up your company’s bank accounts in a way that works best for a small business.

Here are five things to consider when establishing your day-to-day business finances.

1. DAILY TRANSACTIONS SHOULDN’T COST YOU

For new or existing small business owners, managing cash flow and unnecessary business expenses are the key to financial success. However, finding a checking account that addresses these needs can be tricky. Because the cash flow of a small business varies from day to day, a checking account with no transaction fees, no minimum balance requirement or monthly maintenance fee is often best. Ease of access is another important consideration: Does the account offer online and mobile banking, bill payment and debit card access – all free of charge? These features allow business owners to keep their business account management simple and low-cost, so they can invest valuable time launching and growing their business.

2. LET YOUR REVENUE EARN MONEY FOR YOU

As a business grows, its financial needs evolve as well. When revenue increases, it’s common to see an accrual of funds within a company’s checking account sitting idle. This is a great time to open a no-risk business savings account that can be paired with the checking account to allow those extra funds to grow at a higher rate, as well as to ensure that when unexpected expenses arise, funds are readily available.

Savings options range from a simple interest-bearing savings account to a competitive Business Money Market account or a Certificate of Deposit (CD). Important considerations include fees, interest rates and terms (specifically for CDs). Whichever savings tool a business owner decides to use, they are all helpful in saving for both expected and unexpected business expenses, while earning a little extra money at the same time.

3. CREDIT CARDS – TO APPLY OR NOT TO APPLY?

A business credit card can be a great way to cover expenses that the business incurs, but may not have funds to pay for immediately. Charges to a credit card don’t accrue interest for a month, so as long as the business can pay off the balance each month, credit can act as a free, short-term loan. It’s important, however, to remember a few basic rules:

• Even if the credit card is used for business purposes, it’s still tied to the owner’s personal credit report.
• Interest fees can be very high, so it’s important to use credit wisely and pay off balances as quickly as possible.

On the upside, there are many benefits to using a company credit card for business expenses. Most providers offer reward programs for business cards to earn airline miles, points for other purchases, cash back, etc. In addition, applying for a credit card is faster and easier than applying for a loan through a credit union or bank.

4. FUND THE ASSETS YOU NEED TO GROW YOUR BUSINESS

A term loan is similar to a consumer auto loan – payments are the same each month with a term ranging from three to five years. Term loans are a great option if you need to buy a vehicle or equipment that helps your business operate or adds to its productivity. Interest rates on term loans are typically fixed, so business owners can plan for a regular expense.

Always do your homework: Researching rates and offerings is an important first step. Credit unions and banks are eager for your business, so bring your list of questions and make sure you’re comfortable with what the lender proposes

5. HAVE A SAFETY NET

Businesses can easily apply for a line of credit, which typically gives them access to a larger amount of credit should they need it down the road. For example, if a company has employees who are paid every two weeks, but customers are only invoiced monthly, a company may need to cover payroll expenses before the payment for that work is realized. In this case, a line of credit is a great option. Like a credit card, if there is no balance, there is no interest charged. However, interest begins to accrue on the day an advance or draw is made, so the more quickly it can be repaid the better. A line of credit is typically easy to access through a business owner’s online banking system and funds can be transferred seamlessly.

When opening a line of credit, most banks will require some form of collateral – any assets that the business owns. Often times, credit unions are a good option for a line of credit as some will allow for an unsecured line if the business doesn’t have collateral assets. As with credit cards, the business owner is personally liable for repaying any money borrowed against the line

In addition to all of these considerations, it’s also important to shop around for the best options. Your personal bank or credit union may not always be the best for your small business.

Shop around and see what different financial institutions have to offer.

With the right mix of cash flow and credit accounts, small business owners are able to spend more time focusing on their passion and pursuing their goals – the reasons they started a small business in the first place.

Candice Aragon is the vice president of marketing for Bellco Credit Union.