5 Signs You Need a New Business Bank
Small-business owners tend to stand by their bank.
For some, that allegiance is due to loyalty: 40% of business owners say their bank appreciates their business, and 30% feel they are treated better than the average customer, according to J.D. Power’s 2021 U.S. Small Business Banking Satisfaction Study.
In other cases, it’s due to inertia. On average, 14% of small-business owners plan to switch business banks in any given year, but only about 7% actually do so, according to data collected by J.D. Power from 2018 to 2021.
“They may complain about their bank, but they just sort of figure ‘Well, they’re all the same,’” says Carolyn Katz, a business advisor and certified mentor with SCORE, a national volunteer organization that offers free business mentorship.
Sticking with a business account that doesn’t suit your company can hurt your bottom line. Excessive fees, restrictive limits and insufficient business products can cut into profits and stall business growth. And all are cues that it’s time to shop around for a business bank account.
When to switch business bank accounts
1. You’re exceeding your limits
Exceeding transaction and cash deposit limits is a good sign your business has outgrown its business checking account. While it’s tempting to simply upgrade to the next account tier your bank offers, now is a good time to explore your options and compare limits, fees and services at other banks. More on that below.
2. You’re hit with excessive or surprise fees
While some fees are expected, charges for overdrafts, wire transfers and ATM usage vary from one bank to the next.
Some business accounts charge $35 or more for overdrafts, for example, while others charge $25 or less — and some don’t charge for overdrafts at all. Compare fees at local banks, credit unions and online banks to find a better fit for your business.
3. You can’t get a business loan
If your primary bank turns you down for a business loan, explore other options. Smaller banks, credit unions and community development financial institutions often have more flexible lending standards than large banks.
At small banks, for example, 66% of applicants were approved for at least some funding in 2021, compared with 48% of those who sought funding with a large bank, according to the Federal Reserve’s annual Small Business Credit Survey.
Applicants at small banks were also less likely to report challenges with the application process, funding time, interest rates and repayment terms.
4. You need additional business products
At some point, your business may need merchant services, payroll support or a business credit card. While your bank may offer these products, it’s smart to research rates, fees and features at other banks and service providers.
A business card with a long 0% intro annual percentage rate period, for example, can help your business finance small purchases and avoid rising interest rates (provided you pay off the purchases before the promotional period ends).
5. You experience bad customer service
No bank is 100% free of issues and errors; the key is how your bank handles them.
Does it take multiple calls, emails or visits to resolve an issue? Do you get conflicting answers to the same question? Do you struggle to even find someone to talk to?
“The account I closed first when I had my own business was the one where I just could never talk to a human being,” Katz says. “If I called them, when I walked into my local branch, they couldn’t find my information; they didn’t know what was going on.”
Another red flag is service that doesn’t match your business hours or style. A bank that handles all customer questions via email might work for an e-commerce business, but it’s less than ideal for a truck driver.
How to change business accounts
You don’t need to make a clean, swift break from your current business bank, Katz says.
“It’s not like breaking up with your boyfriend. You don’t have to call it quits all in one day,” Katz says. “Take some money, put it into a new account, start using that more and give the other account some time to age out.”
You can also keep your current account if it works for you in certain ways (but be mindful of potential monthly fees). Maybe your bank offers the most competitive terms on small-business loans, for example, but you open a new account elsewhere to take advantage of a free business checking account or a business credit card with stellar rewards. Different banks have different strengths, after all.
If you do opt to switch your main business bank account, use a “switch kit” to make sure you have everything in order. These checklists offer helpful reminders, like switching recurring payments and notifying your accountant. Several banks offer these kits to ease the transition for new customers, but you can find one online if your chosen bank does not.
Overdraft Protection: What It Is and Different Types
Overdraft fees can be a major drain on your finances. Some banks charge more than $30 per overdraft and potentially charge that fee multiple times per day if you keep making transactions that overdraw your checking account. If you want to avoid these fees, you can typically opt out of overdraft coverage with your bank. It can be useful, however, to set up overdraft protection instead of opting out so you don’t find yourself unable to pay for something urgent.
What is overdraft protection?
Overdraft protection is a checking account feature that some banks offer as a way to avoid overdraft fees. There are several types of overdraft protection, including overdraft protection transfers, overdraft lines of credit and grace periods to bring your account out of a negative balance. Some other overdraft coverage programs might be a combination of these features.
Before you opt out of overdraft protection altogether — which means your bank will decline any transaction that would result in an overdraft — consider how you might need overdraft coverage in an emergency. For example, maybe you’re using your debit card to pay for gas on a road trip. You need enough fuel to get home but don’t have enough money in your checking account. Instead of dealing with running out of gas, you may want to deal with an overdraft.
How does overdraft protection work?
Here are more details about the main types of overdraft protection that banks tend to provide.
Overdraft protection transfers. When a bank allows you to make an overdraft protection transfer, you can link a savings account, money market account or a second checking account at the same bank to your main checking account. If you overdraft your checking, your bank will take the overdrawn funds from your linked account to cover the cost of the transaction. Many banks allow this service for free, but some banks charge a fee.
Overdraft lines of credit. An overdraft line of credit functions like a credit card — but without the card. If you don’t have enough money in your account to cover a transaction, your bank will tap your overdraft line of credit to cover the remainder of the transaction. Lines of credit often come with steep annual interest rates that are broken up into smaller interest charges that you keep paying until the overdraft is paid back. Be aware that a line of credit could end up being expensive if you use this option to cover your overdrafts.
Grace periods. Some banks offer grace periods, so instead of immediately charging an overdraft fee, the bank will give you some time — typically a day or two — to return to a positive account balance after overdrafting. If you don’t do so within that time frame, your bank will charge you fees on any transactions that overdrafted your account.
Other coverage programs. Some banks are taking a new approach to overdraft protection by offering what’s basically a free line of credit with a longer grace period for customers to bring their account to a positive balance. One example, Chime’s SpotMe® program, allows customers to overdraft up to $200 with no fees. The customer’s next deposit is applied to their negative balance, and once the negative balance is repaid, customers can give Chime an optional tip to help keep the service “free.”
Chime says: “Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC. Eligibility requirements and overdraft limits apply. SpotMe won’t cover non-debit card purchases, including ATM withdrawals, ACH transfers, Pay Friends transfers or Chime Checkbook transactions.”
4 ways to avoid overdraft fees
Set up low balance alerts. Many banks offer an alert option so you’ll get a text, email or push notification if your account drops below a certain threshold. These alerts can help you be more mindful about your balance so that you can put more money into your account or spend less to avoid an overdraft.
Opt out of overdraft coverage. If your bank doesn’t offer overdraft protection — or if its only options cost money — you may want to opt out of overdraft coverage, in which case your bank will decline any transactions that would bring your account into the negative. Keep in mind that this option could put you in a sticky situation if you’re in an emergency and can’t make an important purchase because you don’t have overdraft coverage.
Look for a bank that has a more generous overdraft policy. Many banks are reducing or eliminating their overdraft fees, so if overdrafts are an issue for you, do some comparison shopping to see if there are better options available.
Consider getting a prepaid debit card. Prepaid debit cards are similar to gift cards in that you can put a set amount of money on the card, and once you run out, you can load it with more money. The prepaid debit card can’t be overdrawn because there isn’t any additional money to draw from once its balance has been spent.
Fidelity Bonds: What They Are, How to Get One
Fidelity bonds are insurance policies that protect a business’s finances in case an employee steals from the business or commits fraud. Fidelity bonds are also known as employee dishonesty insurance.
You can buy a fidelity bond on its own or as part of a commercial crime insurance policy. Consider purchasing this coverage if your employees routinely handle money or valuable assets that belong to your business or your customers.
What are fidelity bonds?
Fidelity bonds are a type of business insurance that protects your business finances if an employee steals money or property from your company or customers.
This coverage can pay out to make your business whole if an employee or group of employees commits theft on the job. It goes by a few different names, including “employee dishonesty insurance,” “fidelity bond” and “employee dishonesty bond.”
Despite the name, fidelity bonds are insurance policies, not bonds. Historically, fidelity bonds were similar to surety bonds, which are agreements among the business owner, their client and a third party promising that work will be completed. Today, fidelity bonds are structured like insurance policies. Some companies still use the term “fidelity bond,” while others use “employee dishonesty insurance.”
Does your business need a fidelity bond?
Fidelity bonds are important for businesses where lots of employees have access to your business finances or customers’ property. Consider purchasing this coverage in the following instances:
If your employees have access to your business finances: Nonprofits, medical offices, professional offices and other kinds of businesses where employees make financial transactions are all at risk of employee theft.
If your employees have access to customers’ money or assets: If your employees regularly enter customers’ homes or businesses, a fidelity bond can set you apart from your competitors because customers know their assets are protected. This may be important for janitorial and cleaning businesses, HVAC businesses, plumbing businesses and other in-home service providers.
If you need this type of protection, look for business service bonds or third-party fidelity bonds, which specifically protect a business’s customers from losses due to theft.
If you work as a contractor or consultant: Clients may request that you buy a fidelity bond before beginning work with them. In this case, you’ll also want a business service bond.
If you work in the financial services industry: You may need a specialized type of fidelity bond known as a financial institution bond, which protects financial institutions. If you’re a pension plan trustee, you’re also required by law to have an ERISA bond, which protects pension plan participants and their beneficiaries.
How to get a fidelity bond
You can get a fidelity bond on its own or as part of a commercial crime insurance policy. If your business faces risks like forgery, computer fraud, extortion and counterfeiting, opting for a broader commercial crime policy may make sense.
NerdWallet recommends getting business insurance quotes from multiple companies so you can compare coverage details, coverage limits and premium costs before choosing a policy. Start your search for fidelity bonds with these companies:
If you need a business service bond to protect customer assets: Nationwide sells business service bonds, which cover your customers’ losses if one of your employees commits theft or fraud on their premises, as well as employee dishonesty bonds and ERISA bonds. Read NerdWallet’s review of Nationwide business insurance.
If your primary concern is your company’s assets:
You can also look into bonding companies, which specialize in products like surety and fidelity bonds. Merchants Bonding Company, for instance, was one of the 10 largest writers of fidelity and surety bonds by premium values in the first half of 2021, according to the Surety & Fidelity Association of America
How much do fidelity bonds cost?
The cost of a fidelity bond depends on the size of the bond, which is the most the insurance company will pay out to cover a loss.
According to BondExchange, a wholesale insurance marketplace that helps insurance agents find policies for their customers, fidelity bonds insuring five or fewer employees can cost:
$100 per year for a $5,000 bond.
$167 per year for a $20,000 bond.
$257 per year for a $50,000 bond.
$359 per year for a $100,000 bond
How to Get a Loan to Buy a Business
Not everyone wants to take on the challenge of building a business from the ground up. An attractive alternative can be to step into a business that’s already up and running by purchasing it from the current owner. Some advantages of buying a business may include easier financing, an established customer base and an existing cash flow.
Buying a business is different from buying a franchise. Franchises have a set business model that’s proven to work. However, when you buy an independently operated business, it’s important to show the lender that you, your previous business experience and the business you want to buy are a winning combination.
What lenders look at when you want to buy a business
Because lenders can view the performance record of an existing business, it’s typically easier to get a loan to purchase an existing business compared with startup funding. However, your personal credit history, experience and details about the acquisition business still matter.
Your personal credit and experience
Through credit reports and credit scores, lenders are able to assess how you’ve managed debt in the past and potentially gain insights into how you will handle it in the future. Your education and experience will also be evaluated.
Solid credit history: Lenders look to see if you have a history of paying your debts. Foreclosures, bankruptcies, repossessions, charge-offs and other situations where you haven’t paid off the full amount will be noted.
Business experience: Having worked in the same industry as the business you want to purchase is helpful. Related education can also be viewed as a positive.
Other businesses you’ve owned
Having a track record of operating other successful businesses can have a positive influence on lenders when it comes to buying a new operation.
Record of generating revenue: Business financial statements can help a lender document that your current or past businesses were well-managed and turned a profit.
Positive credit record: Lenders review business credit scores and reports to verify creditworthiness and to identify liens, foreclosures, bankruptcies and late payments associated with your other businesses.
The business you want to buy
Just because a business is operating doesn’t mean it’s a good investment. Lenders will ask for documentation, often provided by the current owner, to assess the health of the operation.
Value of the business: Like you, your lender will want to ensure that you’re buying a business that has value and that you’re paying a fair price.
Past-due debts: Lenders will be interested in the business’s past-due debts, which may include liens, various types of taxes, utility bills and collection accounts.
Most lenders will let you know what they want included in the loan application package, but there are some personal documents that are typically requested, as well as ones related to the business you want to purchase.
The following documents are used to evaluate your personal finances, business history and plans for operating the business after its purchase:
Personal tax returns.
Personal bank statements.
Financial statements for any of your other businesses.
Letter of intent.
Documents from the current business owner will also be evaluated. Some common ones requested by lenders include:
Business tax returns.
Profit and loss, or P&L, statements.
Business balance sheet.
Proposed bill of sale.
Asking price for inventory, machinery, equipment, furniture and other items included in the sale.
Where to get a loan to buy a business
Compared with finding a loan to start a business, getting funding to buy an existing business may be easier. Here are three popular funding options to check into for a business loan:
Banks generally offer the lowest interest rates and best terms for business loans. To qualify for this type of loan, you’ll typically need a strong credit history, plus the existing business will need to be in operation for a certain minimum of years and generate a minimum annual revenue amount set by the lender.
If borrowers don’t qualify for a traditional bank loan, then SBA loans, ones partially guaranteed by the Small Business Administration, may be the next option to explore. Because there is less risk to the lender, these loans can be easier to qualify for. Banks and credit unions frequently offer SBA loans in addition to traditional bank loans.
Online business loans
Another option to consider is online business loans. Online business loans may offer more flexibility when it comes to qualification, compared with bank and SBA loans. Minimum credit score requirements can be as low as 600, and in a few cases lower. Generally, interest rates are higher than what’s available with a traditional bank loan.
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