Banks are fond of promoting products that “small businesses”, in general, supposedly need. As an actual business owner, you know better. For one thing, no two small businesses are exactly the same. Even companies in the same industry can have different cost structures, cash flow situations or payment terms – all of which make different banking products a good or bad deal for them. In order to intelligently select banking products you’ll actually benefit from, you need to know how to evaluate them.
Small businesses are frequently offered credit lines by the banks they belong to (and those they don’t.) Many of these offers seem attractive. They offer the ability to instantly boost your available capital, expand production or finance major purchases. Yet not every credit line fits every small business. Think about interest rates, for instance. If your business intends to carry a balance more often than not, you want to prioritize getting the lowest interest rate available.
But what if you don’t plan to carry a balance? Some businesses simply like the security of knowing a credit line is there in an emergency. For these types of businesses, a higher interest rate (which you will rarely, if ever, contend with) can be traded off against other benefits, like a more lucrative business rewards program.
Business checking accounts also need to be evaluated in terms of what your needs are. Some businesses, by nature, write and receive checks very often. If your business is one of them, that rules out checking accounts with lots of fees and charges. It also tells you that you need excellent online banking services and widespread ATM availability.
On the other hand, if you rarely write checks and need checking only for sporadic occasions, fees become less important. Rather than obsessing about fee minimization, you assess other factors, like minimum deposits or balances, how many free checks you get at the outset and the like.
Banks are eager to position their loan products as being game-changers for small businesses. But the fact is, whether these are smart options is totally a function of where your business is and where it is going. The best loan for your company, for instance, may not be available from a bank at all. Let’s say you have an iron-clad, guaranteed opportunity to close a $50,000 deal – but you need an immediate $10,000 in order to do it.
In this case, the speed of getting the loan proceeds matters more than the interest rate. Thus, it may actually make more sense to use a cash advance from a credit card than to wait for bank approval and potentially miss the boat on your deal. On the other hand, if time isn’t a factor (or if you cannot quickly repay the loan) the lower interest rates offered by your bank could be a superior option.
Payroll processing services are generally unnecessary unless you have more than a few employees. Think about it: if you run a three person business (say, yourself, your spouse and an office assistant) why would you pay a third-party to administer paychecks? You can simply pay all three of you with a few mouse-clicks inside your online banking panel.
This stops being the case if you have 25 employees. Suddenly, trying to manually stay on top of tax withholding and payroll processing becomes a cumbersome chore, prone to costly mistakes and wasted time that would be better used elsewhere in the business. If you’ve reached this stage, there’s a good chance your business would benefit from your bank’s payroll service.
Retirement & Investments
The same goes for retirement and investment services. While banks are happy to set you and your employees up with retirement and brokerage accounts, it makes less sense to do this if you only have a handful of employees. Three or four employees can easily take care of these things themselves at banks of their choice.
Beyond a certain size, though, it is cost-effective for the business owner to centralize and streamline these activities through the company, using one bank.
When it comes to rewards, the same advice that applies to consumers also applies to businesses: use rewards you will actually benefit from. Cash back cards can be a good way for businesses to recoup some of the money they spend on everyday expenditures. As noted earlier: it may be possible to get credit cards with better rewards program if you accept a higher interest rate. For example, if you run a trucking company with employees constantly on the road, a rewards program that gives you 3% cash back from all gas station purchases is much more useful than one that offers 3% on purchases from Office Depot.
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