Banks segment their DDA (Demand Deposit Accounts) markets into various groups:
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.
- Personal, or Consumer Accounts
- Small Business Accounts
- Medium Business Accounts
- Large Business or Corporate Accounts
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.
