Which Business Bank Account Is Right For You?
There are a lot of options on the market, which begs questions and can get you stuck in the limbo of indecision. Should you just open up an account where you keep your personal checking and savings accounts? Should you go with one of the digital banks you saw an ad for on Instagram last week? Not to worry — we’re going to break down the pros and cons of each, and walk you through how to decide.
Digital Branchless Banks vs. Traditional Brick and Mortar Banks
Introduction to Digital Banks
Let’s start by defining what a digital bank is. A digital bank, also called a branchless bank, is one that runs entirely online. It doesn’t have physical locations, and because of this, is often able to offer better Annual Percentage Yield (APY) rates, as well as lower account fees and minimum balances. Online banks are often very user friendly and straightforward to use. They are also just as secure and compliant with federal and state laws as traditional banks.
While some online-only banks are officially chartered and FDIC insured, many branchless “banks” are not technically banks, but rather run and transact with some back end help from traditional banks that are. In these cases, they just provide all the front end services like the dashboard experience, customer service, and mobile app.
You may be asking, why go with a digital bank if they just run on regular banks? Well, branchless banks are usually cheaper, especially for new businesses and startups. Many of them offer perks like high APY and no monthly service fees, even for small accounts. For example, though technically not a bank account, Mercury has expense management features, in addition to supporting ACH transfers and other key functions a bank would perform (with less fees too). As for ATMs, branchless banks usually have large partner networks so you’re not left hanging in the event you need to make cash deposits or withdrawals.
A drawback of going with a challenger startup bank is that they may close, giving you short notice to transfer your funds elsewhere. With Azlo and Brex (for small business) both shuttering their doors in 2021 and 2022, respectively, it’s definitely a risk to be aware of. With the low fees and flexibility typical of branchless banks, however, you may still find the risk is worth it!
Introduction to Traditional Banks
We’re defining “traditional banks” as brick and mortar ones with physical branch locations. These can range from big banks like Bank of America to local credit unions. Traditional banks usually offer more services than digital ones. For example, many have notary services, foreign currency exchange, safety deposit boxes for cash, gold, or other valuables, and branded checks in addition to the basics like being a member FDIC, accepting electronic deposits, and having ACH capabilities. They also tend to come with a small business banker who manages your account, and can give personal and customized advice. This can be especially valuable for larger enterprises, as your transactions will likely be more complex than a new business with less cash flow.
The main drawback to opening an account with a traditional bank is that they come with higher costs and lower APY. Business bank accounts at bigger banks usually have account balance minimums and come with monthly maintenance fees. Many younger businesses may be unable to meet account balance requirements. That said, traditional banks provide some of the lowest term loan interest rates. You may reap the benefits of establishing a relationship early on when you're ready to apply for credit. For their own clients, banks usually provide better conditions and fewer limitations.
Online Banks are Best for Low Fees and Basic Banking Functionality
- Your transactions are simple. If you’re mainly just taking payments for services rendered, then digital banking may be easier and a better fit than a traditional one. Digital companies with few complex transactions (such as blogs, creative agencies, and consulting services) may be better off with digital banking services. Also, if you mainly transact online, you may find that digital banking offers ease of use and extra features. Nicholas Martin of Pest Control Hacks said that as a blogger, he only has two income streams (an Amazon Associate account and PayPal) to receive and send payments to and from his partners. NorthOne easily integrates with both, so he doesn’t need a traditional bank.
- You can’t meet daily balance minimums and/or don’t want to pay fees. Most digital banks don’t have any minimums and come with less fees than traditional banks. This makes them ideal for young businesses who may not yet have a lot of income. Joe Whiteside, co-founder of Honey and Roses Coffee shared that they “exclusively use digital banking (Bank Novo) and are extremely happy with it.” He cited that they offer a free business checking account, without a minimum maintained deposit. For their self-financed small business, a minimum 5 figure daily balance was unrealistic and they couldn’t see the benefits of paying fees at a traditional bank.
Traditional Banks are Best for In-Person Banking, Growing Banking Solutions and Needs
- If you care about having a connection with your banker. For many small business owners, there is a lot of value in being able to call someone who knows your name and business, and who can answer your questions. This was especially crucial when the pandemic hit. Tom Conlon, Founder and CEO of North Street Creative, cites his personal relationship with his local bank (Bank Rhode Island) as the reason why he was able to get a much-needed PPP loan.
- Do you need customized solutions or is time often of the essence? Small businesses with more sophisticated demands such as real estate investing, or more complexity, like having multiple locations, will likely want to opt for larger banks. If you need to be able to rely on one business day wire services, cashier checks, and notary services, then online banking won’t be for you. For Lisa Flood, owner of Solmate Socks and Sunnyside Textiles, the value of having someone proactively communicate with her and strategize when certain loans would be appropriate, is invaluable. As someone with a complex setup (she lives in Oregon, but the businesses she owns are registered in Vermont and North Carolina), going with Bank of America (a national bank) and a dedicated advisor was the best move.
Another Option: Hybrid Approach
Many small businesses successfully adopt a hybrid strategy to combine the best of digital and traditional banking. For example, some keep a significant chunk of their cash in an online bank to reap the higher APY, and just enough to cover emergency expenses in their traditional bank account. Dan Belcher, CEO of Mortgage Relief, mentioned that though he likes using a digital bank, transactions with discrepancies take longer than usual. He also has to make emergency transactions from time to time, which he has to do with a traditional bank. Because of this, his banking needs pointed to having both.
Considering Ethics, Sustainability and Banking Locally
Many small business owners care that their banks align with their values. For some, a bank that gives back to the community is a key consideration. Often, local credit unions are best at this. Clare Mambwe, Founder of Zzabs, uses Summit Credit Union, which is local to her, because they work well with small businesses, give back profits to the community, and sponsor scholarships for students in the area.
When it comes to social responsibility, such as sustainable investment theses, big banks can venture into grey areas. Online banks often run on big bank infrastructure to handle transactions, and ultimately, using online banks still helps traditional banks make money. Because of this, if you want to know that your bank really works to give back, you’ll have to opt for a highly specialized or hyper-local one, for example, Spring Bank, which is a B-Corp. Going with Spring Bank was the best option for Samantha, Founder of Teddy Locks, because as a sustainable business she wanted to be sure her company was ethically aligned end to end.
A Note on FDIC Insurance
The high-profile collapse of Silicon Valley Bank has brought FDIC coverage back to front and center for many people. Remember that the FDIC covers up to $250,000 in deposits. With that in mind, it’s safer to not expect that the government will step in if something goes wrong, like they did with SVB.
Before choosing a bank, make sure to visit the FDIC’s website to make sure that you understand what is covered, and what isn’t.
Here are some quick links:
- Electronic Deposit Insurance Estimator (EDIE) — use this to calculate an estimate of what is covered
- Check if the bank is FDIC insured
- Check which accounts are insured
It’s very typical for new businesses to start out with branchless banks due to the lower minimums and fee structure. Also, as a new business, it’s unlikely that you’ll need complex services unless you’re in an industry such as real estate.
As you grow, you may find that a traditional bank will serve you better, especially since they can service special financing options such as SBA loans. As you reach new milestones in your business, such as opening a new location, passing the six figure mark, and/or hiring your first employee, it’s worth re-evaluating bank accounts.