Choosing Your Bank
Happy Thursday and welcome to INTRO to Finance. I’m Jason, a recovering banker who can’t seem to stop talking about finance. Luckily, today’s topic allows me to indulge in the dark arts of my banking back catalog. The question we’re tackling this week is:
“Does it really matter which bank I choose?”
Even though the IRS requires all incorporated businesses to have a dedicated business bank account, this isn’t a choice that should be taken lightly. It’s true they all hold money, but each bank is different in its own special way. Not every bank offers the same products or services. Finding the right bank and banker for your business can make your life much easier as an entrepreneur.
Keep Money
The only way to guarantee your funds will be there when you need them is by putting your money in an insured bank. The insurance will cover the rare occurrence of a bank failing. Having insurance for such an event isn’t a service that you can just add to any money account, it’s something you need to look for in an institution that holds your money.
In the US, banks offer FDIC insurance up to $250k per company for each eligible account. The different types of accounts covered include checking accounts, money market accounts, CDs, cashier’s checks, and money orders.
If $250k doesn’t seem like a lot relative to how much money your company has in the bank, you can increase the overall insurance on funds by placing them in various types of accounts at the same institution, or by putting your cash at more than one institution. For example, if you had $1M sitting in one account, you’d only have $250k in FDIC insurance on those funds. To increase the insurance, you could divide it into 4 equal portions and place them into 4 different eligible accounts/banks for a total of $1M of FDIC insurance.
Depending on how much faith you have in your bank, you may not feel it’s important to have insurance for every dollar. Having assurances that you have some protection is important to manage risks, but don’t go overboard.
Manage Money
As your company builds a healthy cash balance, there are ways to earn a return or yield on the funds. Banks can offer off-the-shelf products, like money market accounts, that will give you a balance of returns and access to your cash. Other financial institutions can help customize and optimize the returns you want for your business. However, investors give you money to increase the equity value of the business, not to day trade. Keep it simple and nearly risk-free.
Because your business is inherently risky, the goal should be to avoid adding unnecessary risk in the process of earning some money from your deposits. Don’t worry about optimizing for the highest rate possible. The rates are a reflection of the risk in the underlying investment opportunities. Balance the rate with the risk you feel is appropriate for the business. In this current low rate environment, anything close to or over 50 basis points (0.50%) is likely too aggressive. Your time would be better spent generating revenue for your business instead of investments.
Some accounts require you to commit funds with limited access, but your normal course of business will drive fluctuations in your company’s cash balance. Always keep 12+ months of cash in liquid accounts that you have access to withdraw from. It’s more important to fund your business than receive returns. Most banks can offer accounts that earn a little bit of yield while still giving you access to withdraw cash.
If your business has excess cash beyond a year’s worth of runway, you may want to explore options that have more limited access for the withdrawal but allow more customized investment strategies. Institutions with an asset management function can help accomplish this. And if this all sounds intimidating, asset management teams will typically have a dedicated banker to help guide your decisions and offload the burden of being an expert.
Find What Works For You
Working with financial institutions can leave you feeling like you don’t have much leverage in the relationship. It’s important to remember you’re providing them with the lifeblood of their organization – cash. Banks use your funds to provide loans and run their entire operation. There’s value in every dollar you provide to a bank. You have power in the relationship to choose the bank that works best for you and your business.
If you want a banker who knows you personally and knows your business, you can find banks that have relationship managers for you to work with. If you want to do everything from your phone or computer without interaction, there are banks that can provide you with the digital financial tools you desire.
Some banks have even dedicated their products to making entrepreneurship easier. If you don’t have an idea of where to start, here are a few banks to look into:
Mercury Bank
Founded by a couple of repeat entrepreneurs who wanted to make the whole banking experience easier for founders, the team has built a fully-digital and cost-effective bank.
Silicon Valley Bank
SVB understands startups as a venture and innovation bank built by founders and investors, for founders and investors 35+ years ago. 50% of venture-backed tech and life science companies bank with SVB, and their banking and lending services range from getting started, all the way through IPO.
Grasshopper Bank
Grasshopper is a chartered, digital-first business bank serving startup ecosystems across the US to help accelerate the success of entrepreneurs and investors at all stages of their journeys. Grasshopper provides the full stack of banking services you need and has experienced and dedicated relationship managers to support your entrepreneurial journey.
Bridge Bank
Founded in Silicon Valley, Bridge Bank focuses on serving venture-backed and non-venture backed companies. This bank delivers a wide range of financial solutions for small to middle-market businesses.
Some items we discussed may not seem important to your business today, but keep in mind that you’re in a marathon – not a sprint – of building a business. Building a relationship with a bank that can meet your near-term and long-term needs can be incredibly important. Especially because switching banks can be time-consuming and disruptive to your business.
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