At this point, you’re a serious entrepreneur; it’s time to bank like one. And it’s time to officially move beyond the garage sale cash box to set up a dedicated method for money management. You need a business bank account and a separate finance strategy from your personal assets. There’s more than just transactional business to consider when you’re looking for a banking or financing partner. Here’s what every first-year business owner should know about business banking and fund management.
Opening a Business Banking Account
Everyone knows it’s best to start things off by separating the business bank account from any personal assets. Any revenue and expenses associated with your business should be tracked and managed separately. No really. Keep that shit separated if you want to avoid any year-end or IRS tax nightmares.
Brenda went to her local bank, where she already has her personal checking and savings accounts. She’s thinking that she likes her bank, the tellers are nice, and the online banking resources are pretty user-friendly. And like most banks, hers offers a line of business banking products and accounts. What Brenda soon realizes is that the cost of business banking includes monthly statement fees, transaction fees, and a minimum account balance. Before she opens an account with her bank, she decides she wants to do a little more homework on other banking options. As she shops around, she’s shocked to see just how many business fund management channels there are out there.
You might do the same thing, go to a bank that you know well and are familiar with. Don’t just head off to the first branch you see; instead, make sure that the institution has all of your business needs in mind before opening an account with them. . Almost all banks will incorporate fees as a part of conducting business – but the key is knowing what you need first. For example, do you need EFT capabilities (ACH and wire transfer services), paper checks for payroll purposes, automatic payments from one account to another) etc? You’ll have to do your research before picking a bank, but once you know what’s important then it becomes clear which banks are the best fit.
Bank vetting is no different than interviewing other vendors for your business. Before you say yes to a bank, make sure it’s the right fit by asking all of their fees and minimum balance requirements as well as whether or not they meet your specific needs in terms of what services you need from them.
Bank or Credit Union
It’s worth looking for the advantages and disadvantages of banks versus credit unions. These two types are the most prevalent and commonly used for business banking partners.
A traditional bank is a for-profit institution that has access to more capital, making it easier if you’re looking for large amounts of cash. They also have their own branches and ATMs nationwide, which makes it easy when traveling or commuting around the city. The downside with banks is that they usually charge higher fees on loans and other banking products than smaller institutions do–but this can be balanced out by simply using your account less often!
How many times have you gone into a bank and felt ignored or brushed off by the staff? It’s frustrating, right? Credit unions put customer service at the forefront of their business strategy. They offer better interest rates on loans for members (and non-members), but lower fees to keep more money in your account! The best part is that credit union members get to vote on policies and decisions made by their credit union – it takes care of its customers like family. There are some drawbacks too: most banks can’t compete when it comes to overall convenience, technology, and product offerings
Both are equally safe for investing. Banks are backed federally with the FDIC, and credit unions are insured by the NCUA up to $250,000.
Business Financing Options
When it comes to working with your bank or credit union for business financing needs, there are several options available, let’s see what Ryan is going to do.
Ryan’s been busting his ass for the past year and he needs some help. He has a few options to get financing on new equipment, tools, and to improve cash flow, but doesn’t want to risk mortgaging his house, which would jeopardize his family. So, Ryan is going to explore three different types of financing options: standard loan, credit cards and lines of credit.
Business Loan With Your Bank
Working with your chosen bank, you’ll have plenty of loan options. There are term loans, which are most common, providing an infusion of funds and requiring a monthly payment and an applicable interest rate. Banks also offer a form of factoring, where they use invoices as collateral but do not buy them like traditional factoring companies do. The average interest rates for national and regional banks for business loans are as low as 2.58% – 7.16%.
Consumer vs. Business Credit Cards
Ryan is on a mission to acquire working capital for his business. Here’s what he needs to know about credit cards: first, the difference between consumer and business cards and second, why using either one can be beneficial as long as it remains dedicated exclusively to his business purchases.
The only differences between a consumer credit card and a business one are that the consumer protection laws of 2009 normally don’t apply to business credit cards and business cards typically have better rewards programs and perks.
The best way to find the right credit card for you is by using Hub Wallet or NerdWallet. These sites have countless potential benefits that can help consumers and businesses alike! See below some perks:
- 0% APR Up To 20 months
- Cash Back Rewards or Points Accrual for Discounts
- Travel Benefits (huge if your business requires regular travel)
- Free Foreign Transactions
- Free Credit Report Monitoring
- Credit Card Fraud Protections
It’s equally important to understand your risks with any kind of credit card. Late payments can tank your credit, making it impossible to secure traditional loans down the road if you need them. And many cards require annual fees or charge additionally for certain types of transactions.
Another thing to look out for are cash advances. This is one of those terrible credit card features that you should only use in dire circumstances. Cash advances on your credit card offer hefty interest rates and only the most desperate would ever consider using one this option; so tread carefully!
It’s important to be mindful of the risks you take when using a credit card. Trust your instincts and control how much debt you rack up, but know that taking these types of risks with money is just part-and-parcel for entrepreneurs who have big dreams! It may seem scary at first glance, but thinking about all the things that could go wrong if something goes awry in business; bankruptcy or homelessness, are never fun possibilities. But, as an entrepreneur, these risks are just part of what comes with running a small business; so don’t let fear get in the way! Just make sure you plan ahead by being mindful and smart when handling money matters – this will help grow your company into something bigger someday!
Don’t let anyone get in your head, either, with non-business-centered advice or scare tactics. Credit cards can be incredibly lucrative solutions if you’re in control and manage your spending well. Just do your homework on both sides, the business credit lines and the consumer credit lines, to identify which will help you accomplish your objectives.
Credit Card Processing
The other credit card dilemma Ryan and Brenda have, is knowing where to look to secure a credit card processing channel for customers. Here are five key questions to answer before deciding on one for your business.
- What percentage of each sale goes to paying the transaction fee?
- How compatible is the provider’s software with yours?
- What charges are associated with contract termination?
- How does the provider manage risky or flagged transactions?
- What fraud protection services does the provider offer?
Here are just a few of the best point of sale and credit card processing partners for 2021, according to US News:
- Stax by Fattmerchant: Great for high-volume US businesses
- Helcim: Ideal for international businesses
- Payment Depot: Best for those low-risk, US businesses
- Square: Ideal for low-volume merchants
- Stripe: Great for internet and eCommerce businesses
- PaymentCloud: Perfect for those high-risk merchants
Tax Structures & Business Write-Offs
Every entrepreneur should consult a tax professional to understand taxation. Taxation is just one more thing you need to know if you want your business model to work long-term and this advice applies to every type of business. You don’t want any missed opportunities or confusion with accounting that could derail everything!
The owner of a single-member LLC is taxed the same way as that of a sole proprietorship – profits are passed through to their individual taxes annually. A multi-member LLC can be filed as an S corp, which has to do with employment taxes. Here the owner can choose to be taxed as an employee, not as the owner. One thing to keep in mind is that if the owner has other net earnings that pass through, it would be classified as dividend income
A corporation can make an election to be taxed as an S Corporation, even though it’s a separate tax-paying entity. The main downside of this is that there is double taxation in the corporate structured world. However, if you speak with your CPA or other professional advisor on ways to reduce and/or eliminate double taxation for your company then you’re set!
Ryan and Brenda would really need to understand their respective structures to better grasp their tax responsibilities.
In general, small businesses with a single owner pay roughly 13.3% tax rates. More than one owner can translate to 23.6% tax rates. Small business S Corps usually pay around 26.9% in taxes, while C Corps are taxed at a fixed 21% if they do not elect the S-corp structure. The IRS also allows for a roster of potential deductions, including startup expenses up to $5,000.
Organizational and operational costs can also be deducted in some instances for those businesses investing $50,000 or less in their startups. The effective small business taxation rate is typically 19.8%, although different entities can expect varied rates. And the IRS will only allow owners to file a business loss three out of five years of filing. After which, if you’re not earning a profit, the IRS can prohibit you from claiming any business losses on your taxes.
Where to Find Money Outside of Traditional Lending Institutions
Banks and credit unions aren’t your only source of business funds. There are a host of other ways to find the capital you need to start, launch, maintain, and scale your business. Here are just a few resources worth exploring.
- Grants: Visit SBA.gov to explore available grants for your business, some of which are based on minority ownership, regional markets, and niche offerings.
- Accelerator: These are short-term programs, usually around three months, that help start-ups get their feet on the ground. Oftentimes, a small amount of seed capital is provided to nurture the formation stage.
- Business Mentors: You can network to identify a business mentor willing to support your business endeavor directly.
- Family & Friends: Some entrepreneurs have friends or family members willing to support the business financially during startup.
- Personal Savings: It may make sense to invest your savings to launch a business. For some, keeping another line of work in the early days of operation can keep a steady flow of income until they can transition calmly to the new venture. That’s how we did with our company Awareness Branding & Consulting.
- Investors: There is an abundance of options for getting capital from investors. Online fundraising platforms, social media, events where investors tend to go (charity events, sports events etc) and even a simple, well personalized email to the right person can bring you an investor. There are also some crowdfunding platforms where you can exchange equity for capital.
- Crowdfunding: Kickstarter, Indiegogo and FundRazr are websites that give business owners the opportunity to raise funds without giving up any equity. These sites allow entrepreneurs of all backgrounds from tangible product-based companies to nonprofits and services businesses to get the needed boost to get off the ground.
The Importance of Bookkeeping & Accounting From Day 1
If you’re still feeling a little foggy about the financial aspect of starting your business, take a deep breath. Financial and accounting mistakes are always going to happen, but being on top of it can stop them from happening more frequently. Being proactive about these errors will help you address the problem quickly before it gets out of hand.
Your strict money management practices are what’s going to prevent catastrophic errors from happening, so stay organized! Transparency means catching faux pas quickly which will help keep things running smoothly even at times when they feel trying (and unavoidable).
Additionally, the best way to secure loans and investments for your business is through clean and accurate books. There are a lot of people who have had their loan applications denied because the books were not in order or organized properly. This can be avoided with help from an experienced tax professional, CPA, and bookkeeping service. They will ensure that you’re well-organized so your chances of getting turned down again due to messy finances is significantly reduced.
Financing, accounting and banking can be challenging topics to explore, especially if the business side of both are new to you. Let us help you develop some of these money-related best practices and guide you through the next phases of your business. Schedule a FREE consultation!