Banking research can feel a bit like dental work, but there’s value in both traditional banking and the online banking paths, depending on what kind of business you have.
Where you keep your finances and how you process your business transactions is vitally important. Depending on your type of business, you can avoid tons of unnecessary fees by banking in one place compared to another. Certain banks also offer easier options for dealing with cash, or if you make frequent use of bank checks (aka cashier’s checks).
To help understand which type of bank will be best for you, start by asking yourself these questions:
How do you (or want to) pay most business expenses?
How do you want to receive business income?
What purchases do you regularly make on behalf of your business?
What perks matter most to you?
Let’s dive in:
People envision traditional banking as national banks, but really there’s a lot that falls under the heading.
Traditional banking encompasses banks with brick and mortar branches, like Wells Fargo, Chase and Bank of America, but also local or regional credit unions, and small local banks specific to your town or state.
If you’re a cash based business, or have a job or address that allows you access to an exclusive credit union, traditional banking is often a good option. If you’re offering services where you need to make large cash deposits at the end of the day or week, having a local branch of your bank available is extremely convenient. Traditional banks also offer protection services like local lending authority, flexible coverage for overdrafts, and even tax assistance. You can often set up a Roth IRA, trust fund, and do your personal banking all in one place. The variety of services available is the real treat of traditional banking. And if you’re in a smaller or rural community, local banking can have a really positive impact by money circulating throughout your area.
The downside of traditional banking is that it’s...well...a little too traditional at times. There’s stiff, impersonal lending procedures (especially with national bank chains), and online banking options can be limited and unintuitive. While bigger banks might have a certain cushy appearance, there is often lag time on virtual deposits. That is if you can get a business account at all. Getting entry-level accounts can be a steep process and rely heavily on your credit score and income level.
While smaller banks and credit unions tend to invest into your local community (big yay!) without an extensive atm network, you could be looking at a lot of withdrawal fees. Fees in general are a challenge with traditional banking, as they frequently charge monthly maintenance fees, ATM fees, overdraft fees, bill pay fees, and stop payment fees (which can really add up if you are ever facing a fraudster that has your account information, and hits you from multiple aliases.) We have a breakdown of fees charged by the most common national banks available for free here.
Traditional banks generally have business account requirements, meaning businesses have to keep anywhere from $500-$5000 minimum balances in their accounts. Since so many businesses have a lot of fluctuating cash flow, things like costs for transfers (generally to the tune of $15 for every $1000 in transactions), minimum balances, and additional fees hit small businesses where it hurts most-- especially if they are new.
Traditional banks also have a bit of notorious customer service experience. In fact, about 70% of small business owners voice displeasure with their bank and are looking into other options, with only 1 in 10 small businesses saying their bank meets their needs.
Then there’s the commitment issue. This is not distinctive to traditional banks but should be considered: you don’t want to lock yourself into a bank that is difficult to leave if it doesn’t suit your needs. There can be hidden fees in switching banks, sunk time in processing, and the hassle of actually getting your money and moving your assets. The cost benefit of traditional banking really relies on whether the services you’ll be getting actually add to your business practices.
Sometimes called “neobanks” or “digital banks,” an online bank is essentially a banking institution that exists solely online, without any brick and mortar locations. For most people, online banks have significant advantages to traditional banks, but it depends a bit on your business.
Because online banking is entirely online, it often comes with highly intuitive apps and online programs to help manage your money. This means your business finances will be much more mobile, portable, and easy to read. The biggest perk for many online banking customers is that, across the board, the fees are much lower than with traditional banking (sometimes even nonexistent).
Additionally, online banks tend to have lower money transfer lags and less strict approval requirements. You can expect to get set up faster, have an easier time transferring your money between accounts. Because they have lower overhead (no brick and mortar locations to operate), online banks often are able to pass that savings onto you in the form of interest-earning checking and savings accounts, at rates that nearly always surpass what a traditional bank can offer.
Online banks also tend to be streamlined for digital commerce. Platforms for document sharing, lead generation, and HR support often form quick relationships with online banks. In this way,online banks are equipped to quickly respond to the budding landscape of technology and customized needs of 21st century businesses.
Online banks offer many of the accommodations that traditional banks do, including payment and money transfer services, financial education tools and budgeting support, and (depending on the bank) some lines of credit. Loan processing is also much quicker, and pre-qualifying for loan programs can take minutes instead of days or weeks. To deposit checks, you can snap photos of checks to deposit via your online bank’s app, and since online banks typically partner with large independent ATM networks, you can still get fee-free ATM withdrawals near where you live and work. Even in the rare instance you need a bank check, you can order one to be securely delivered in the mail.
The downside of online banks is that there’s no local ATM or branch to deposit cash. So, if you’re a business that needs to deposit cash on a frequent basis, online banks won’t have those localized resources. There’s also your comfort level with tech to consider. You’ll have to be really good friends with your cell phone in order to take full advantage of many of your online bank’s offerings.
No matter if you’re traditional, or prefer online banking, finding the bank that fits your needs and anticipates your business is paramount. Operating a small business is administratively heavy, so finding a system that works long term to support your in providing services, or keep track of your hustle is important.