Small Business Banking: Financial Advice for Owners

small business open signSmall businesses aren’t really that small. In fact, small business optimism (the overall health of the small business industry) has hit an all-time high! According to a report created by the National Federation of Independent Business (NFIB) in April 2018, small business is booming and profit growth has skyrocketed. Not only did the small business optimism index increase to 104.8, the number of small businesses reporting poor sales also fell substantially.

With such success and profit, small businesses need to think about their finances more than ever before. But what do small businesses need to be aware of when it comes to finances? Let’s take a deeper look into small business banking.

What is Small Business Banking?

Small business banking refers to the management of finances for smaller, non-commercial businesses. This type of banking is generally done at a bank or credit union and services may consist of any or all of the following:

  • Savings Accounts
  • Checking Accounts
  • Electronic / Online Account Access
  • Certificates of Deposit Accounts (CDs)
  • Checks
  • Money Orders
  • Safety Deposit Boxes
  • Loans
  • Insurance
  • Investments
  • Financial Advising

Banks vs. Credit Unions for Small Businesses

When it comes to your business’s finances, make sure they’re in the right hands. The two major types of financial institutions are banks and credit unions. Take a look at our bank vs. credit union table to figure out which is right for you!

bank vs credit union comparison table

While credit unions may be smaller and community-oriented, many small business owners prefer credit unions over banks because of their low fees, low loan interest rates, high deposit interest rates, and exceptional customer service. In fact, a recent study suggests that large banks have the lowest satisfaction rating among small business owners. However, many people aren’t sure how credit unions work.

How Do Credit Unions Work?

Credit unions are non-profit cooperative financial institutions that allow members to join based on a commonality such as where they work, where they live, where they went to college, etc. They’re owned by members, governed by volunteer board members, and work diligently to:

  1. Invest any profit back into the credit union through specials, lower rates, and discounted services.
  2. Return any profit back to members as a dividend.

Unlike with banks, members can rest assured that profits aren’t going straight to shareholders. Instead, all members benefit from the profit the credit union gains.

Like LRRCU, most credit unions also offer co-op shared branching. While banks tend to charge customers for using ATMs that aren’t associated with them, credit unions take part in shared branching which allows members to access and withdraw funds in the shared network anywhere, anytime, and with no added fees.

The Tax Issue Between Banks & Credit Unions

Credit unions do not pay state or federal taxes because they’re 501 c(3) organizations (non-profit). However, credit unions do pay for things such as property, payroll, and various business taxes.

Bigger banks believe this is an unfair advantage for credit unions and want to strip them of their non-profit status. If that were to happen, credit union members would face higher interest rates and lower returns on savings, ultimately hurting the communities that credit unions thrive in. To keep credit unions alive, communities have come together to fight for their financial right.

Tips for Small Business Banking

Start with a Solid Partnership

If you’re not entering your small business venture alone, put together a solid partnership agreement for the protection of everyone involved. Among other things, a business partnership agreement should outline percentage of ownership, how profits and losses will be allocated, and how ownership will be redistributed if one partner opts to leave the business or retire.

Become Familiar with Your Business’s Finances

Small business owners have a lot to deal with and organizing finances may be one of the last things on the “to-do” list. Because of that, accounting tasks tend to be left for internal bookkeepers and outside accountants. However, it’s vital for small business owners to have a direct hand in their finances and know what their company’s financial health looks like. Be sure to take time to become familiar with your finances and keep up with them weekly.

Keep Business and Personal Accounts Separate

If you’re still managing your small business through your personal financial account, make it a top priority to transition to separate accounts. If you keep them bundled together, filing taxes will require more time spent on separating business and personal incomes, expenses, and receipts. Plus, having separate accounts is invaluable if your small business is ever audited. A separate business account will prove which expenses were used for growing and operating your business.

At a minimum, set up a separate checking account and credit card exclusively for business use. The added benefit is that your business credit cards will help build up your company’s credit score. Also look into Select Employer Group options for your business in order to benefit your employees.

Know Your Company’s Credit Score

Your personal credit score determines if you are creditworthy. Similarly, your company’s credit score determines whether you’re able to acquire business financing and if you’ll receive favorable interest rates and lending terms.

Business credit scores are ranked on a smaller scale (0-300), but are measured using much of the same criteria as your personal score:

  • The amount of available credit you’re utilizing
  • Your repayment history
  • The length of your credit history
  • Your portfolio of outstanding debts

In addition, company size and industry risk help to determine small businesses’ credit scores. Being aware of your credit score will allow your business to continue operating without disruption.

Treat Yo’ Self (with a Salary)

In the early days of your new business, you might think it’s necessary to pump all available funds back into your business. However, to keep your personal finances secure and separate from business finances, you should pay yourself a salary. Since it’s hard to know exactly how much money will come into your small business, especially in the first several years, look into paying yourself a percentage of the profits rather than a set amount.

Protect Your Small Business While Banking Online

Make sure you protect your company’s assets and funds while banking online. Whether you’re managing your small business’s finances personally or you’ve hired someone to take the reigns, keeping finances secure while banking online is crucial. If you aren’t careful, hackers and cybercriminals can take advantage of your vulnerabilities. Be sure to double check that you have anti-virus and anti-malware software installed, your computer software is up to date, and your connection is encrypted.

Need more small business financial advice? Check out our interview with Nichole Kambesis, a small business owner, for her top 5 small business tips!

Liz Oliver
Liz Oliver

Liz Oliver is the Member & Loan Services Officer at Lancaster Red Rose Credit Union. She’s been a member of the LRRCU team since 2007.