A Banking Guide For Small and Medium Sized Businesses

What are some of the things that some small businesses need to know about banking? What are the banking practices for small businesses and how can one choose a banking partner.

This article talks about the best banking practices small business should have.

Small businesses should focus on the “5 Cs”

The 5 Cs of Credit are basic guidelines that a bank or credit union might use to evaluate a potential borrower.  As a business owner, excelling in and/or understanding each of these categories could drastically improve your chances of receiving a loan. So what is this magical set of criteria?

• Character – A lender’s overall sense of a borrower’s trustworthiness, credibility and overall character. Make sure you have high-quality credentials/references and are sincere in all your interactions with the bank.
• Capacity/Cash Flow – At its core, a borrower’s ability to repay the loan. Get your financials in order and know exactly how you plan to use the funds and how you plan to repay.
• Capital – The amount of money invested personally by the owner/management team. Banks are more willing to lend to someone who has invested some of their own money in to growing the company.
• Conditions – Economic, industry, and environmental conditions that may affect the company (may also refer to how the loan proceeds will be used). Know your market and be prepared to explain exactly how your business will succeed.
• Collateral – Assets that will act as a backup if you can’t repay.

Not all banks, credit unions, and community banks are equal.  

Many business owners simply choose a bank based on convenience and cost without planning for future growth. With such a short-term outlook, business owners often fail to find a bank that might best be suited for their future needs.

Different banks have different risk tolerance for different businesses and industries.  Some banks, for example, finance restaurants while others do not. So make sure to do your research.  Ask the bank what type of experience they have in financing your industry.  Also, ask them some key questions like:

• Do they offer small businesses lines of credit and term loans?
• What you need to be eligible for a credit line or term loan?
• What types of terms and conditions come with these types of loans?
• What documentation do you need to apply for these loans?

You might just find that the bank you previously overlooked because of a slightly higher cost is actually the best one to fund the future growth of your business.

Make sure you have a two-way relationship with your small business banker. 

Often times, small business owners have a very limited relationship with their bank, mostly checking transactions (e.g. deposits and debits). Do not forget that a good relationship with your banker could benefit your business in many ways. I know many business owners who were able to get a credit line or small business loan, had fees reversed, and even received temporary overdraft protection in the event of low funds – all due to the trust and track record they built with their banker over the years.  So get to know your business banker and make sure s/he knows you!

Research the bank’s reputation before entering into a relationship.

Talk to colleagues and businesses in your network to find out what their banking relationship looks like. Business owners are happy to share their experience with their bank, especially if it was negative. They can tell you about their experience with the lending process and obtaining credit. Ask about the reputation of their banker and how they support small business growth. Find out which bank will not only give you the best services, but is willing to go the extra mile for you.

What innovations and convenience does the bank offer small business owners to make their lives easier?

Finally, do not forget that some financial institutions offer small business owners incredible tools to make their transactions faster and more efficient. For example, look for free online bill pay where payments can become automated on a monthly basis, which saves both time and money. Other financial institutions can offer services to track expenses and monthly charges so you can better understand how your business is changing over time.

Check your credit.

Larger banks can take their pick of what businesses they want to work with. That means it may be hard to get into a large bank if your business is very new or has a low credit score. Small, local banks may be more forgiving of new local businesses and may have less stringent credit requirements for opening accounts and lines of credit.

Check out the credit requirements for the banks you’re considering to see if you’ll be able to get what you need out of your business accounts.

Approach Internet banks with caution.

Online banks are becoming more common, but should be approached with some caution and after thorough research. Part of banking is building a business relationship and building your business credit, both of which may be easier offline than online. There are times when you physically need to attend to your banking needs with a banker. An Internet only bank precludes that one-on-one attention and personal service.

If you’re in a very early stage and only need very simple business services (like opening a business checking account), an online bank may be able to meet that need. However, you may want to consider the cost and difficulty of switching to a more traditional bank if you later need services that your online bank can’t provide.

Location

Where is the bank located? Consider the bank’s proximity to your office, home, and areas where you travel. Do you need the ability to make deposits on a daily or weekly basis? Do you often withdraw cash for your business? Do you ever need bank-issued certified checks? Do you travel for work and need to be able to use national ATMs without fees?

Consider the nature of your business and how often you will need to frequent the bank when making your decision. If you need to physically enter the bank more than weekly, than make your choice accordingly. Likewise, if you travel nationally, you’ll want a bank you can count on from coast-to-coast.

What are your digital needs?

How often do you use technology for your banking needs? Do you automate your accounts online? Do you want to be able make deposits with only your cell phone? If your work requires travel or if your company is tech-centric, you may want to have more digital options when dealing with your bank.

If that’s important to you, then look for a bank that uses the latest tech and has the platforms to support your particular needs.

What services do you need?

Certain services should be expected from all banks. At a minimum, you should look for your bank to provide the following business products. Basic Business Account Services include:

• Checking account
• Savings account
• Credit card/debit card
• Checks and a checkbook
• Deposit-only card
• Online business banking
• Employee checking accounts

Find out the details on each of these business banking products, as well as any fees or requirements.

If you have other business banking needs, such as opening a line of credit, ask about it up front. You don’t want to sign up for business checking and find out that they can’t give you a loan when you need it.

What kind of support do you need?

Some banks keep staff on hand to help you manage and grow your business. Such specialists may be valuable as you grow your business. They may be able to advice on how to run your accounts, fund growth, and expand your business. They may also be helpful with tax or payroll issues.

When choosing your account, think about how much support you need not just today, but going forward as your business grows and changes. If this resource is something you think you’d use as your business evolves, then consider its availability when choosing a bank. You can always find an outside specialist, but an internal one will already be familiar with your business, your finances, and you personally.

Choosing the right bank is a critical decision for small business owners. A strong relationship with your banker can prove to be valuable when growing your business. A good small business bank will make sure qualified small businesses have adequate credit to support their business, offer solutions to problems, and go the extra mile to ensure continued growth.