Tangled Up in Blue Guy

Don't Waste Too Much Time Here

I am only using this blog because some blogger.com blogs are setup to only receive comments from other blogger.com blogs, or open-id. I understand the desire to avoid spam, but it seems a bit exclusivistic to me.

My real blog is at Tangled Up in Blue Guy.

Also see this post in which I complain about blogger/blogspot sites.

Sandwalk: Danger on the Southern Border

Sandwalk: Danger on the Southern Border

This seems to be pretty close to my uncle's farm in Northwest Minnesota, when I look at the map on Google and expand it to display the border. He has land that is on the border and when we went up to that particular quarter-section we would have fun hopping back and forth between the United States and Canada. It hasn't changed much, and we could still do it. I don't because I made a stupid mistake 7 years ago, and because of my record I have to wait until 2011 to get back into Canada. I just don't want to risk being able to go back to Winnipeg occasionally by getting caught sneaking into Canada.

There is a great deal of social interaction between the Manitobans and the Minnesotans (I am proud to say that I have a pair of Canadian half-cousins.) It is true, though, if anyone wanted to get into Canada, there are vast open spaces from the Lake of the Woods to Vancouver through which to sneak.

And Gerald, don't you think you are being a bit grandiose, and playing up the persecution a bit too much? You really are starting to sound like a crank.

Overdraft and Other Fees

How does this help me choose an account?

The key to understanding how to use your checking account lays in how banks determine their fees. Banks have fees that combine profit protection and penalties. Profit protection is how banks stay in business. A bank must be able to maintain the %10 deposit reserve or the bank faces penalties. The FDIC can declare a bank insolvent if it has too much activity that keeps it below that level. So the profitable banks carefully balance lending and deposit accounts to make sure that they don't wander from their reserves. They are also careful not to exceed the reserve allowed, because holding too much in reserve is like having unperforming inventory. The excess reserves aren't making money. This would be the same as you keeping money hidden in a mattress or a coffee can. It would be there, but it wouldn't be doing anything for you.

As a business owner, you know the importance of only keeping the inventory that generates profit. If your inventory is labor, such as in a mechanical shop or in metal fabrication, you work to make your labor more productive and do your best to make sure that your employees have the equipment that will enhance their productivity. A bank works the same way.

A loan granted through underwriting is a carefully considered decision by the bank. Underwriters review the credit history of the business and often review the turnaround of accounts receivable to make sure that the business is churning money and will have the monthly cash flow to cover agreed payments. Banks will lend to riskier customers, but as you may have experienced in the past, they will offer a rate that is higher than you had hoped. They do this to offset the increased possibility that the loan may not be paid back, which would cause an imbalance in their loan reserves.

What Happens When You Write A Check That Isn't Covered?

Banks have computers that are programed to make decisions based on your account's past history, your total relationship with the bank, the amount of the check and the likelihood that you will be able to cover an overdraft in a short period. The bank's computers can also be set to read the following three items:

1. the Ledger Balance, which is measured as the total credits to your account less the total credits that have posted completely into the account,
2. the Available Balance, which is measured as the Ledger Balance and the net balance of any pending items that have not completely posted to your account, and
3. the Collected Balance, which is the sum of the Ledger and Available Balances and the net amount that the bank has actually received from other banks through items you have deposited.

(There will be more detail on the above three measurements in a separate article.)

With those three measurements, the overdraft program is set to make a decision as to whether to bounce or pay a check. Officers assigned to accounts have authority to override system decisions within a limited time-frame, and banks allow this because of human factors that can't be programmed. But they do this at risk to the bank, so they don't often pay items that the system decides to return.

Until your deposits cover the outstanding overdraft items, the bank is lending you the money. A bad check is a loan that is held against the reserve and costs the bank money in several ways.

1. The overdraft costs additional human handling. Overdraft notices are generated by the computer, but have to be stuffed and mailed by human hands.
2. The credit ability of the bank is reduced, and so the bank makes less money.
3. The bank incurs greater risk, and so its rating can suffer. This may mean that the rates at which it borrows money is increased. (Yes, banks borrow money. Big amounts that they have to pay back.)
   
4. Your account may be in trouble from long-term financial difficulties. The officer realizes that no matter how nice you are, your business may be getting close to insolvency. The bank may have to write off your overdraft.

These are the reasons that a bank must risk-screen your business and personal history prior to agreeing to open an account. There are reasons for you to be careful in choosing a bank, as well.

A Few Basic Tips About Checking

Choosing the Correct Checking Account

Banks segment their DDA (Demand Deposit Accounts) markets into various groups:

1. Personal, or Consumer Accounts
2. Small Business Accounts
3. Medium Business Accounts
4. Large Business or Corporate Accounts

I am going to target my entries to Small Business Accounts. With many definitions regarding what is considered a small business, I will consider this definition to be my guide:

Small Business – a concern, including its affiliates, that is independently owned and operated, not dominant in the field of operation in which it is bidding on government contracts, and qualified as a small business under the Code of Federal Regulations (CFR) criteria and size standards in 13 CFR 121.

So, my working definition includes retail stores, contractors, home businesses, restaurants, entertainers and other groups who fall under 500 employees. Small businesses tend to rely heavily on a rotating cash flow and really should watch their money very carefully. I work with people that are talented at the services and products they sell, but haven't been trained extensively in how to use money to their advantage.

All businesses need checking in order to purchase the raw materials they need for their business. For tax purposes it is very important to have a separate business checking account, so that your costs and profits don't get mixed with your personal income and expenses. Keep your records separate so that you know exactly what is from and what is for your business and where your business stands financially. Tax experts (including the guvmint) frown on the use of deductible business expenses for personal use, and having mixed funds in the same account makes auditors cranky.

Banks look at the way that you keep your records when making underwriting decisions. Don't forget that they are business people, as well. Money is their inventory. They will use your checking account's funds to lend money to other businesses, and so they will provide tools to help prevent you from losing money needlessly as long as your business is bringing in funds.

Services to Look for In Choosing Your Bank

Resist the temptation to default to your personal bank when you are making the decision on which bank to use for your business. My boss would wish that I tell you that keeping everything within a single institution simplifies your financial life, but then I am writing the blog for you and not my boss. Shop around, find a bank that fits your business needs. If the bank also fills your personal banking needs, that is fine. I am saying, make your decisions carefully and not rashly.

Most banks have websites, the better websites give you the opportunity to view the details of their services without committing to a sales pitch. Find a checking account that is not too much service for your needs (and likewise too expensive.)

New businesses should start with more basic accounts. This may seem too obvious to write, but there are options that may end up costing you extra service fees if you don't evaluate your needs carefully. Also, don't choose an account that is based on your dreams, but one that is based on your current situation. Once you outgrow your account, the bank will be happy to convert you to the type of account that works for you.

Fees, Fees, Fees

Banks charge fees, one way or another. Check out the level of activity required to avoid additional fees. Basic checking accounts for business aren't usually completely free, and part of that is because banks take more risk with business accounts than they do with personal accounts. Expect to pay at least $5.00 a month for a bottom-tier account.

A bottom-tier account allows a few transactions per month. Wells Fargo's basic account allows 20 transactions. This includes checks written and items deposited (not 20 deposits,) $3000 per month in cash deposits and free online banking. Fees will be assessed with additional charges. USBank has a free small business account which includes more transactions per month.

Please remember that because each state in the US has its own banking regulations regarding fees, you should compare fees for the state in which you will be doing business. Some fees will vary.

Also, before you open an account, find and read copy of the bank's disclosure of its fees and policies. Some banks may forgive a few fees that come up as a "surprise" but you need to remember that there is a limit to Customer Service. Small customers that incur too many fees, such as overdraft fees will find themselves reaching deaf ears if they cost the bank more than their money makes for the bank and lose the privilege of reversed fees. Believe me, yelling at a customer service rep that the bank is "robbing" you does not lead to many reversals.

Overdraft Fees

I will explain other fees in separate posts; but I think it important to explain overdrafts and what they mean to a bank. I hope that you take from this an understanding of overdrafts and why their fees are so high.

Overdraft fees are not a profit center for any bank. American Banks move money through the Federal Reserve Bank system. Banks lend and borrow money to make money. The money that you put into a savings account is lent to other entities throughout the bank's system. The Great Depression was disaster for banks and their account holders because of a run on banks in which people withdrew all of their savings and checking from banks while the banks had loans outstanding.

Banks could no longer honor their Demand account obligations and failed. One of the resulting regulations was the FDIC, the Federal Deposit Insurance Corporation. The FDIC will honor all DDA obligations up to $100,000 if a bank fails. In order to maintain coverage, banks are required to maintain a "reserve" of %10. This means that for every dollar of outstanding credit and loan that a bank has extended, they must retain 10 cents as a guard against a run on withdrawals from their accounts.

If you write a check and the funds aren't in your account, and if the bank decides to honor the check, they are giving you a loan. They are advancing funds with the expectation that your deposits will cover all of your outstanding obligations (including check card transactions that haven't posted as of yet.) Because of this, there is money that they can't lend through their normal channels. It is now money that is losing money for them. The overdraft is meant to be punitive, and to impress upon the customer that you have an obligation not to spend more than you deposit.

Overdrafts are paid in the order of largest item first. While this seems unfair and can at times hurt the customer when you make a mistake, they have a very good reason for this and believe it or not it is to protect the consumer. Banks do provide services which help protect against overdrafts.

More on that in the next post, including the concept of "uncollected funds" and then we will continue discussing how to choose your bank and checking account.

Welcome to a New Blog

I wish to welcome you to a new blog that I have created for a purpose separate from my other blog. I am in the process of planning a book on the subject of small business banking, based on the proposition that small business owners have learned their trade well enough to make a solid go, but don't really understand how the banking part of their business works.

I work at Wells Fargo Bank, helping business bankers resolve customer issues. Before moving into this department, I serviced small business owners directly. In the time that I have been doing this I have been able to identify some of the problems that people have; some of their mistakes cost them money that they can ill afford to waste.

Wells Fargo is not sponsoring me in this blog. It is not endorsed by Wells Fargo, and I won't be revealing any secrets that would compromise my employer's integrity. More importantly I won't be putting my job in jeopardy. I guess that last is more important for me than for any of my readers. I have another blog, at which I discuss more topical matters and will steer this blog away from any issues that don't help my readers successfully take care of your business banking.

Some of my entries may appear in a book that I am planning, so comments and corrections are welcome.