Starting a Small Business Part 2: Banking

by Charles Naut

With my small business officially formed, setting up a bank account is the next step towards legitimacy. To businesses, a bank is crucial for, among other things, collecting money, making payments, and getting a loan. When starting off, many people opt to do their business's banking through their personal bank accounts. One recent study found that 77% of small businesses are funded with personal funds so using a personal account can seem pretty natural. Since I opted to form an LLC instead of a sole proprietorship, it is advised by the IRS to separate my personal finances from my business finances. While this adds more work and expenses, doing this will, besides keeping my business compliant, also be helpful come tax time and makes my accounting straightforward meaning it will be easier to determine how my business is doing. With over 4,000 commercial banks in the United States, there are a lot of options for a small business to choose from. There are plenty of lists comparing the top banks to help make the decision. I ended up looking at reviews for over 15 banks including well known big banks like Chase and Bank of America, digital-only banks like Revolt and Azlo, and credit unions like Navy Federal Credit Union and Consumers Credit Union.

Digital-only banks can be a good fit for certain businesses. Azlo, for example, is a bank created just for freelancers, entrepreneurs, and founders. They offer some of the standard features that traditional banks offer like a debit card and FDIC-insured accounts. What sets them apart is their completely online experience, community features, Stripe/Square/PayPal integration, and built-in invoicing. For an online e-commerce business, this combination of features can be exactly what they are looking for. Without the cost of physical branches, digital-only banks can usually offer low fees and no minimum balance requirements. But these banks aren't right for all businesses. If you have to deal with cash for your business, not having a physical location where you can deposit cash is a non-starter. Banks like Azlo don't even offer checkbooks which are absolutely needed by some businesses. In the last 10 years, there has been a proliferation of these digital-only banks but they still haven't gained wide adoption. In the United States, just 3% of millennials have their primary checking account at a digital-only bank like Simple or Chime. This percentage is even lower for other generations. For the banking needs I expect to have, a digital-only bank seems too restrictive without any physical locations and missing features like a breadth of financing options.

Credit Unions are another appealing option for small businesses. In the last decade, credit unions have seen their assets grow at twice the rate of regular banks. In the U.S., credit unions can offer lower fees than regular banks because they are member-owned nonprofits that are exempt from paying federal income taxes. While credit unions have a mostly local footprint, over 1,800 credit unions are a part of the CO-OP shared branching network that gives their members access to thousands of branches and ATMs across the country. By law credit unions must lay out requirements for membership. This typically means you have to be employed by a certain company, go to a specific school, or be a part of a particular community to join the credit union. First Tech Federal Credit Union requires that you either work for a sponsor company, work for the state of Oregon, work or live in Lane County, or be a member of the Computer History Museum or Financial Fitness Association. Navy Federal Credit Union requires that you either be an active service member, veteran, family of an armed service member, or work for the Department of Defense. Consumers Credit Union (CCU) has the straightforward requirement of being a member of the Consumers Cooperative Association which is just a one-time fee of $5. CCU offers online banking, a no-fee business credit card, and a savings account with no monthly fee and no minimum balance. While there are thousand of credit unions out there and despite their growing size, most have fewer than 10,000 members and all the credit unions combined still hold lower deposits than Chase. They also typically have inferior online banking experiences and limited credit card and financing options.

While digital-only banks and credit unions definitely have their appeal for certain businesses, big traditional banks are still the best option for the majority of small businesses that have a wide range of needs. The largest ones have thousands of physical branches for when you need to deal with cash or need to talk to someone in person. They have a wide range of financing options from short term lines of credit for a couple thousand dollars to long term loans for hundred of thousands of dollars. They tend to have many credit card options with great perks. They've also heavily invested on technology. Most large banks now have website and mobile app experiences that rival those of startups and are far ahead those of credit unions. It is difficult for a credit union or upstart digital-only bank to compete with the range of offerings that large banks have right now.

I ended up opening a savings and checking account with Chase, the largest bank in the United States by assets ($2.53 trillion). Chase has over 5,300 branches and 15,500 ATMs across the country. I don't expect to go to the bank physically very often but having that option is reassuring and having access to a large ATM network is definitely convenient. I do most of my personal banking with Chase so it is a plus to be able to do both my business and personal banking with the same bank. When setting up my checking account, Chase made it easy to transfer money from my personal account to my business account and even had certain fields pre-filled for me. I transferred $1,500 from my personal account into my new checking account to have the $15 monthly fee waived. The whole process was pretty smooth and done completely online. There were more steps than I expected and a few hiccups along the way but overall it was not bad. Chase also offers some of the best small business credit card options out there. This was important since I wanted a credit card with good rewards that will help me build credit for the business. I applied for the Chase Ink Business Unlimited credit card two weeks ago and as of this writing I still haven't heard back if I'm approved. My business doesn't have any credit or income yet so I'm not sure if I will even be approved for it.

With my business incorporated and my bank account set up, I'm now ready to start making money and getting that bread!

Key takeaways:

  • IRS requirements around business banking are confusing and unclear
  • Desire to have separation between personal finances and business finances but doing both with the same trusted bank with a familiar experience is convenient
  • Digital-only banks might be able to compete with large banks and their wide range of services by providing amazing experiences to niches like freelancers
  • Lower fees of digital-only banks and credit unions don't seem to be enough for the majority of businesses
  • As a small business you are unsure what your needs might be in the future so large banks are a good option because they can serve you as your needs change
  • There is a bit of a catch 22 with getting credit since you don't have any income yet or credit history