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Where to Look for Start-Up Business Loans in 2018

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

There are many ways to obtain funding for your small business, and they come in many forms — from business loans, personal loans and credit cards, to grants and crowdfunding. The key is to find what’s right for you and your business.

According to the Small Business Association (SBA), 73% of small firms used financing in some form in the past year. These funds could come from loans, other sources or even personal savings.

In reality, most small business owners are going to one primary source to get their business off the ground: their personal wealth.

In the same survey of business owners, the SBA found that more than half (57%) of small business owners used their personal savings as a source of capital.

“There are numerous sources of capital available yet too often we see start-ups, especially those run by women, tapping into their person credit for funding and financing,” said Kathy Warnick, National Association of Women Business Owners National board chair. “Not only is this potentially personally detrimental, but it can also make it difficult to receive funding from an outside source as your business grows.”

In this guide, we’ll explain all the different ways you can fund your start-up — and help you determine which strategy is best for you.

Choosing the best funding source for your business

One of the first steps in looking for funding is asking yourself some questions. Here are a few to figure out what you need and what the best options are for you.

  • What do I need this money for?
  • How much money do I need?
  • What’s my credit score like?
  • Does my product have enough social drive to power a crowdsourcing effort?
  • If I get a loan, how long do I think it will take me to pay it back?
  • How quickly do I need these funds?

Everyone has different needs and their own unique situations, which is why it’s important to take some time to think about them. If you need a smaller amount of money and your personal credit score is in good shape, a credit card for your business might seem like the right choice.

In fact, according to the SBA, more than one-third (39.5%) of non-employer firms needed $5,000 or less in capital. Even among firms with employees, one in five said they needed $5,000 or less.

Finding the right start-up business loan

After answering the questions above, perhaps you think a business loan is the right way to obtain the funds you need. The next step is to figure out which type of start-up business loan is best for you and fits your needs.

Here, we’ll take you through the advantages and disadvantages of certain types of start-up business loans.

SBA Loans

Best for: If you need more money for larger purchases and investments, an SBA loan might be a better option for you, but you’ll have to contend with strict eligibility requirements and more paperwork.

An SBA loan is a loan lended by the Small Business Administration, a government organization that was founded as part of the Small Business Act of 1953. The Small Business Act created the SBA with the purpose of aiding, counseling and protecting the interests of small business concerns. The SBA helps all sorts of businesses and now specializes women, minorities and armed forces veterans.

How SBA loans work: Although it might sound like an SBA loan is receiving money from the SBA, that is not actually the case. The SBA doesn’t lend money. The money is loaned from a bank and that loan is backed by the SBA.

The process for acquiring an SBA loan varies from person to person and business to business. This timeline can be longer or shorter depending on how prepared you are. The SBA offers a guide to help you through this process called the Build Your Business Plan tool. If you already have a business plan, this puts you a step ahead and can accelerate the process for you. According to the SBA’s application timeline, the loan amount you are requesting can also affect the time period. They suggest expecting to wait at least two to five months from start to finish.

The repayment period also varies and depends on several factors, which include the type of loan, the amount of down payment and the amount requested. For example, according to the SBA, an SBA microloan would have a maximum loan term of six years. An SBA microloan of more than $10,000 could not be charged more than 7.75% interest, while a microloan of $10,000 or less could not be charged more than 8.50%.

Pros:

SBA loans have several advantages:

  • They typically have competitive terms with rates and fees similar to non-guaranteed loans.
  • SBA loans also offer counseling and educational opportunities to help you as you take the first steps (or the next steps) in starting your own business.
  • SBA loans generally require lower down payments, which is a huge bonus if you don’t already have a lot of cash at hand.
  • Requirements for overhead (expenses such as run, repairs, utilities) are flexible, and, in some cases, no collateral is required.
  • Depending on several factors, including your needs, you could receive anywhere from $500 to $5.5 million in funding for your business.

Cons:

  • Strict eligibility requirements (see below)
  • They can require a lot of paperwork. See the SBA Loan Submission checklist.
  • You won’t be allowed to receive funds from another lender.

Let’s expand on some of the “catches” that come with SBA loans that could be a disadvantage for you, starting with those eligibility requirements.

According to SBA.gov, “eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates.”

Here are some of the requirements for an SBA loan:

  • Your business must be for-profit and operate legally in the U.S.
  • You (as the business owner or loan applicant) must have invested equity which can come in the form of time or money.
  • They can require a lot of paperwork. See the SBA Loan Submission checklist.
  • But perhaps the biggest disadvantage is that you will not be allowed to receive funds from another financial lender. Meaning, if you were hoping to get an SBA loan for $50,000, you can’t go get another loan for the bank for $20,000.

Another disadvantage is having to wait. Depending on your business needs, you might not be able to wait 60 to 90 days. “Be aware and prepared,” Warnick told LendingTree. “Waiting for funding to kick in can be a challenge and requires patience.”

If you are eligible, then an SBA loan is certainly something to consider. Although they might be hard to qualify for, if you do qualify, the advantages are aplenty.

Microloans

Best for: If you’re not seeking a whole lot of funds for your business, just enough to get your started — or keep you going — a microloan could be the best option for you. But it is important to consider factors, such as your credit score, your needs and of course, other options before making a final decision.

If the amount of capital you’re seeking is, well, micro in nature, a microloan might be your best option. Microloans are loans for small amounts and are given to small businesses with either one or few employees.

Microloans can come from several sources, including but not limited to the SBA lenders; Accion, a global nonprofit organization; Kiva, a nonprofit lender; and others.

These are some pros and cons of microloans:

Pros:

  • Good for people who don’t have a good business credit score.
  • Microloans may help your business establish credit.
  • Microlenders can assist you through the process.
  • Because the amounts are smaller, you have less to lose in the event that things don’t pan out the way you expected.
  • The interest rates can be low or even nothing. For example, Kiva offers some microloans with zero percent interest.

Cons:

  • The amount of funds received might not be as much as you would have hoped for. According to the SBA, “Intermediary lenders must use the funds loaned to them by SBA to capitalize a revolving loan fund from which they must make loans to small businesses in need of $50,000 or less.”
  • Depending from which microlender you are borrowing, you might not get the funding at all. On Kiva, for example, your loan might not be crowdfunded by enough lenders.

Start-up equipment financing

Best for: If you have good credit, and are in need of equipment for your business this might be the best option for you. But it’s always best to consider all of your choices before making your final decision.

One reason it’s important to ask yourself what exactly you need your funds for is because it can help you decide what kind of loan to get. For example, if you plan to open your own restaurant, and you need funds to secure equipment for your kitchen, then start-up equipment financing might be the best option for you. Start-up equipment financing is a loan which uses the equipment you buy as collateral, and it can be obtained through various lenders.

Here are some pros and and cons of start-up equipment financing.

Pros:

  • You can pay off the equipment while making revenue at the same time. Ernie Quilantan, president of the Greater Dallas Restaurant Association, says this is a huge benefit because you’re not stuck waiting. “If you’re a restaurant owner, you can’t do much if you’re saving to buy a fryer and other kitchen equipment,” Quilantan said. “But when you finance your equipment, you can get started and pay it off as you go.”
  • The depreciation of the equipment could be used as a tax benefit in the future.

Cons:

  • You’ll need a solid credit score. (This is only a con if you have a low credit score.) If your credit score is low, Warnick advises you not to get discouraged. “Don’t take ‘no’ personally or let that stop you from pursuing another financing option,” she said. “We believe that by increasing awareness of the financing resources available and being better prepared to demonstrate a pattern of responsible borrowing, start-ups can be better positioned to grow and scale their businesses.”
  • By the time you have paid off your equipment, it might be outdated. “This is a problem because it creates a cycle,” Quilantan said. “On the upside, you’ve improved your credit. On the downside, you’re stuck with old equipment. Then it becomes tempting to your improved credit to finance newer equipment. It can be hard to get out of this cycle, especially if you’re not bringing in enough profit.”

Personal loans for business

A personal loan is simply an agreement to receive a certain amount of funds to be paid off in a certain about of time with a fixed interest rate. These funds come directly to you, deposited straight into your bank account. Unlike start-up equipment financing where the funds must be used for equipment, these funds can typically be used for anything. So you can use this money for equipment, marketing, consulting or whatever else you might need.

These are some of benefits and disadvantages of personal loans.

Pros:

  • There has been a rise in online lenders over the past few years, which has made the application process much easier.
  • Depending on the lender, the terms of personal loans can range from 24 to 84 months, like financing a car, which means you would pay it off faster.
  • So long as you make on-time payments, you can improve your credit score.

Cons:

  • Most fees are non-refundable.
  • If you have poor credit, your interest rates could be pretty high.
  • You will be required to provide verification of your income. If you are in the beginning stages of building your business, this could be a challenge.
Best for: If your credit score is in good shape, this could be a good option for you. What is probably most appealing about personal loans is the benefit of being able to do what you want with the funds. But make sure you weigh the pros and cons of this and other options first.

Pro tip: Develop a relationship with a lender early.

“Perhaps the most important tip for start-up businesses is to develop a relationship with a lender early,” Warnick said. “It is important if at all possible to develop a relationship with your lender early so they can grow into the business with you and the funding you need can more easily increase as you scale.”

Other sources of funding

Sometimes loans aren’t the best moves for your business. If that’s the case, consider three other options to obtain the funds you need for your business. While this guide focuses on start-up business loans, here are a few quick tips about three options that might be more suitable for you.

Credit cards: The pro and cons depend on your credit score (read: interest rates). If this is the option you choose, an advantage is that you can use the money for any business needs once you have it. When it comes to credit cards, Warnick says it’s important to get one early, regardless of whether you need it. “Once you need it you won’t be able to get one — even a small one,” she said. “Use it and pay it down to zero at least once a year. Show a pattern of responsible borrowing. It will go a long way as you grow and will make it easier for the bank to increase the borrowing limit.”

Check out the best small business credit cards here.

Grants: Grants can come from many shapes and sizes such as Grants.gov, the SBA Women’s Business Center, the Economic Development Administration, the National Association for the Self-Employed and many more. The hard part is determining your eligibility, but if you qualify, grants are great because usually you don’t have to pay them back.

Crowdfunding: As mentioned at the beginning of this guide, crowdfunding is a great option because it combines marketing and funding. This usually works best for a new product, so it might not be your best option if you’re a restaurant owner. But you never know. Places like Kickstarter are great places to begin if it’s something you want to consider.

Next steps: How to use start-up business loans

So you made your decision on which start-up loan to get or where to get your funds from. Now what? Take some time to re-evaluate what your needs are and be sure to prioritize them. Your priorities will differ. You might prioritize in order of more expensive needs to least, or in terms of what you need first.

Here are some things to consider:

How much do I need to borrow?

It might be less than you think. The amount of capital differs for everyone based on your needs, which can be difficult to estimate when you’re just starting out.

According to the SBA, 39.5% of non-employer firms needed less than $5,000 in capital. For firms with employees, 22.5% of those firms also needed less than $5,000, while 7.3% of firms with employees needed anywhere from $250,000 to $999,999.

Where will I work?
Do you plan to work from home or rent an office? Think about whether a co-working office space would make sense for your business. If you plan to open up a brick-and-mortar shop, will you be building a new location entirely or renting a space? How much will that cost?

What do I need?
Then think about all of the equipment you will need for this location, from computers to furniture and everything else. Will you need a warehouse to store merchandise?

How will this grow?
What steps do you plan to take to ensure the growth and success of your business? Will you advertise? And what kind of marketing efforts should you make?

While these questions may seem overwhelming, it’s important to remember that you’re not racing anyone. Take your time to make the best decision for your business. You can’t sprint a marathon!

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jesus Jiminez
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Jesus Jiminez is a writer at MagnifyMoney. You can email Jesus here

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Small Business

How to Convert Your For-Profit Business into a Nonprofit

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Converting a for-profit business to a nonprofit entity could be a smart move if charity and community impact has become your focus as a business owner. But making the change requires more than applying for tax-exempt status.

The process would largely depend on your state’s laws regarding business conversions, and not every company can become a nonprofit organization without a good reason for doing so. Only certain types of businesses can turn into a tax-exempt entity, a procedure that requires filing paperwork with state organizations and the IRS.

Keep reading to learn what it takes to turn a for-profit enterprise into a nonprofit organization, and if it’s the right move for your business.

Reasons to convert a for-profit business to a nonprofit

Although there are several tax-exempt designations within the IRS’ Internal Revenue Code, most nonprofits fall under the 501(c)(3) umbrella for charitable, religious and educational organizations.

The benefits of 501(c)(3) status include exemption from federal income tax, as well as the ability to receive tax-deductible charitable donations. Organizations with the 501(c)(3) designation are also more likely to receive recognition from grant-making institutions and foundations.

Before you can be awarded tax-exempt status, you would need to meet the IRS’ criteria. Organizations may not be formed to benefit private interests, and no portion of the organization’s net earnings can benefit a private shareholder or individual. Nonprofit employees can earn a salary though.

Meeting these requirements could be difficult as a for-profit business, unless you’ve had charitable intentions from the start, said Gene Takagi, an attorney with NEO Law Group, which represents nonprofit and tax-exempt organizations.

“Consider making that conversion if the existing for-profit entity really has a goal that’s not financial…but is really all about providing a public service or public good for charitable or welfare purposes,” he said.

Here’s an example: A neighborhood store that sells the work of low-income artists started as a for-profit business to get equity investments from community members but was unable to generate substantial interest and capital. Turning the business into a nonprofit organization would allow the owners to collect philanthropic donations to keep the store open. Because the business had a charitable, community-focused intent from the start, it could be approved for tax-exempt status.

But if a business seeks 501(c)(3) status for less charitable reasons, the IRS could deny the request, Takagi said. For instance, a failing business looking to get out of tax obligations couldn’t become a nonprofit without making operational changes.

“You’re really going to have to make a good case to the IRS,” he said. “It’s got to look different than what you were doing in the past.”

Converting for-profit to nonprofit: 5 steps to follow

Nonprofits are highly scrutinized, and business owners may be faced with more regulations than they’re used to, said Brenda Asare, president and CEO of The Alford Group, a consulting firm that advises nonprofits.

“Those processes are in place to dissuade people who may want to come into this sector to take advantage of other people philanthropically,” Asare said.

To make sure you correctly convert your for-profit business to a nonprofit, here are a few steps to follow.

1. Check entity conversion laws in your state

When you form a business, you must set up a certain entity, or structure, which determines the number of owners a business can have, the owners’ personal liability and taxes the business owes. Common entities include sole proprietorships, limited liability companies (LLCs) and corporations. Nonprofits are usually formed as corporations, though they are able to receive tax-exempts status.

When changing your business to a nonprofit, you would have to convert the current structure to a nonprofit corporation structure. Depending on where you live, only some entities may be eligible for conversion.

In Louisiana and California, for example, corporations, LLCs, general partnerships and limited partnerships can convert to another type of entity through the state’s Secretary of State office. On the other hand, New York does not permit statutory conversions for business entities. Instead, business owners must establish a new entity, then merge the two companies into one.

Check with your state’s Secretary of State office to make sure you would be permitted to change entities.

2. File conversion paperwork

Because nonprofits are corporations, they must be incorporated through the local Secretary of State. If your for-profit business was formed as a corporation, a conversion could be as simple as amending your incorporation documents, also known as articles of incorporation. You’d need to file incorporation forms again to make the conversion, which would typically range in cost from $50 to $150. Additionally, because a nonprofit corporation does not have ownership, as a board of directors shares responsibility of the organization, existing shareholders of the for-profit business would have to forfeit ownership.

If your business is not a corporation, you would need to file new articles of incorporation with your Secretary of State. The articles of incorporation would call for the organization’s name, the purpose of the nonprofit and a designated registered agent to receive lawsuits and correspondence on behalf of the organization.

Other requirements when forming a nonprofit corporation include appointing a board of directors to make decisions about the organization’s activities, finances and legal compliance and drafting bylaws that regulate the board’s management and activities. The board of directors would also approve your compensation as the executive director or CEO of the organization, including your salary, health insurance and paid leave.

3. Apply for tax-exempt status with the IRS

You would need to submit IRS Form 1023 to apply for tax exemption under the 501(c)(3) code. Additionally, you would need to include a statement of your receipts and expenses, a copy of your articles of incorporation, a written description of your organization’s activities and a copy of your bylaws. You may need to apply for tax exemption at the state level as well.

For instance, nonprofits in California must file Form 3500A with the California Franchise Tax Board to be exempt from state income taxes. Organizations in Texas need to file Form AP-204 with the Texas Comptroller of Public Accounts, while nonprofits in Florida must submit Form DR-5 to the state’s Department of Revenue.

Timing is key when forming a nonprofit and requesting 501(c)(3) status, Takagi said. Make sure your organization is compliant as a nonprofit — meaning you have a charitable purpose, board members and bylaws in place — as soon as you make the entity conversion. This could help you avoid getting turned down for tax-exempt status and owing taxes to the IRS, he said.

4. Decide what to do with your business assets

After you convert a for-profit corporation to a nonprofit organization, all existing business assets would be held in a charitable trust, which means assets could only be used for the organization’s charitable purposes going forward. Intellectual property could be included as well, such as books, music or art.

You could take assets out of the business before making the conversion if you want to limit the assets that are put into the nonprofit, Takagi said. Then, any assets you decide to put into the nonprofit at a later time could be categorized as a charitable donation.

If you’re concerned about a delay in receiving tax-exempt status, you may not want to lock all of your assets in a charitable trust right away. You could form a separate nonprofit and continue running your business to maintain access to your assets, Takagi said.

“It might be more practical in some cases to not convert but run them side by side for a little while,” he said. “Then either merge or dissolve the company and then donate assets to the nonprofit at that time [when] you already know the nonprofit has 501(c)(3) status.”

5. Set up your fundraising strategy

Once you no longer run a for-profit business, you must begin collecting charitable donations to keep the operation afloat. Nonprofits need to generate a profit, despite their title, but those profits must be reinvested in the organization rather than distributed to owners and shareholders, as a business would do.

State laws regulate fundraising activities. You may be required to register with a state entity before you begin soliciting donations from local residents, and you may need to register in multiple states if your donor base crosses state lines. For example, nonprofits in North Carolina must obtain a license from the Charities Division of the Secretary of State’s office. Depending on your state, you could be required to renew your registration each year to continue legally accepting donations.

Private and public grants and individual donations are common funding avenues for nonprofits. Donors would likely want to understand the organization’s mission and target market before giving money. A misconception about the nonprofit sector is that organizations can easily secure money with few strings attached, Asare said. However, donors often scrutinize nonprofits before making a contribution.

“Nowadays, there aren’t many places you can get money without the expectation that organization is making an impact,” she said.

Donors could be suspicious of a nonprofit that was formerly a for-profit business, Asare said. Be prepared to explain how you plan to spend donations to show you’re not seeking personal financial gain.

“I think a good measure would be looking at what percentage of the dollar is going to the services and programs,” she said. “This is something donors are interested in and they will ask.”

Ongoing requirements after making the switch

After you’ve made the change from for-profit to nonprofit, you’d need to meet ongoing requirements to remain compliant as an organization. From filing certain tax forms and reports to paying particular taxes, here are some requirements to keep on your radar:

Form 990: Most tax-exempt organizations are required to file IRS Form 990 each year. Nonprofit entities must describe the organization’s activities, governance, financial information and accomplishments to justify its tax-exempt status.

Organizations that have generated at least $200,000 annually or have assets worth at least $500,000 must file Form 990 yearly, while organizations with fewer assets and a lower income can file Form 990-EZ, a shorter version of the form. Form 990-N, which is even shorter, is available to nonprofits with gross receipts of $50,000 or less.

Employment taxes: Nonprofits with employees must pay employment taxes, which include federal income tax withholding and Social Security and Medicare taxes. You could be responsible for federal unemployment tax as well.

State filings: States often require nonprofits to file reports each year. These reports could include corporate filings, financial reports, fundraising registrations and state tax-exemption forms. Failing to file annual reports with your state office could result in penalties or loss of your tax-exempt status.

The requirements for nonprofits may seem excessive, but policies are in place to ensure that organizations are honest about how the program uses donated money, Asare said. Compliance standards act as a safeguard to make sure money is going toward services and not into the pockets of the people in charge.

“The window is closing on some of that bad behavior,” she said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
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Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]

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Small Business

Brick-and-Mortar vs. Online Banks: Which is Better for Small Businesses?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Separating your personal and professional finances is crucial when starting a business, and changes in technology are making it more convenient to do so. Not only could you turn to traditional brick-and-mortar banks, but you could take advantage of the resources that digital banks offer.

Opening a business bank account would allow you to clearly track your income and expenses without putting your personal spending in the mix. Managing a business bank account would also help you build your credit profile — you could become eligible to open a business line of credit or credit cards connected to your account.

Whether you choose an online bank or a brick-and-mortar bank would depend on which type fits your needs as a business owner. Keep reading to find out what kind of bank would be best suited for you.

Small business banking: Brick-and-mortar vs. online banks

A key difference between traditional and online banking is the flexibility that digital banks provide, said Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling. Small business owners could have around-the-clock access to online banking services as long as they have a device and an internet connection.

“This can certainly help busy business owners who are strapped for time by allowing them the option to bank on their schedules,” he said.

Brick-and-mortar banks

Although most brick-and-mortar banks now offer online banking features, consumers still must make some transactions in person, Coleman said, such as cash transactions that require personal identification. When opening a business checking account with Chase, for example, customers must meet with a business banker before enrolling in online and mobile programs. Still, this could be a draw for some business owners.

“Some consumers are simply more comfortable having a physical banking location where they can perform transactions and speak to banking associates in person,” Coleman said.

New business owners could also benefit from the guidance that bankers provide, said Grier Melick, business consultant at the Maryland Small Business Development Center. Establishing a personal relationship with a banker could also be beneficial if you plan to apply for a small business loan. You may have a better chance of being approved for funding if the bank already knows and trusts you.

“Oftentimes, small business owners do not know everything that they need to from a business banking perspective,” Melick said. “Having some direct human involvement can help with that.”

Online banks

Online banks have lower overhead costs than traditional banks, and those lower costs typically result in higher interest rate yields on deposits for digital banks than branch-based banks, he said. For instance, a high-yield business savings account could have an APY as high as 2% and no minimum account balance.

However, brick-and-mortar banks have the advantage of allowing customers to make cash deposits or withdrawals; an online bank typically wouldn’t offer that feature, Coleman said. However, online banks sometimes belong to free ATM networks, like Allpoint, which would allow you to avoid the withdrawal fees that you’d incur at other ATMs.

Best of both worlds

It’s possible to have accounts at both types of banks, Melick said. For example, the owners of a brick-and-mortar store may start with an account at a local bank branch, then open a digital account when they decide to start selling online.

“Instead of severing ties with the bank, they could open an online account as well to handle their other revenue streams,” he said.

You could be subject to banking fees at both traditional and online banks, Coleman said. However, online banks generally charge considerably fewer fees and you may be able to avoid overdraft, monthly maintenance and ATM fees that come with a traditional bank account.

Here’s a quick look at how the two types of banks stack up.

Online banksBrick-and-mortar banks
24/7 access to accounts and banking features.Online banking features typically offered, but some transactions may have to be completed in-person during bank hours.
High-yield accounts available.Lower interest rates because of overhead costs.
Customers cannot complete in-person cash transactions or meet with bank representatives.Customers can make cash transactions, and bank representatives are available for meetings.

Digital services on the horizon for traditional banks

Online banks are growing in numbers and popularity, Coleman said. Traditional banks have taken this trend as a cue to bolster digital offerings for consumers.

“As a result, we are seeing traditional banking introduce more digital options for providing services,” he said.

The presence of digital financial technology is expanding within the financial services industry, comprising 7% of the total equity of U.S. banks, according to research from consulting firm McKinsey. To keep up, traditional banks must consider ramping up digital efforts in areas such as design, innovation, personalization, digital marketing, data and analytics to provide value to customers.

A few traditional banks rolling out expanded digital services include:

Bank of America

Earlier this year, Bank of America created Business Advantage 360 for customers who have business deposit accounts with the bank. The free tool provides a digital dashboard showing business owners their major expenses and transactions, as well as automated cash flow projections that can be adjusted to account for new sales or other data. Users can also connect with small business bankers through the dashboard.

PNC Bank

PNC Bank rolled out a digital business lending platform this year in partnership with OnDeck, an online small business lender. Leveraging OnDeck’s digital loan origination process, PNC aims to provide customers with business financing in as few as three days, a significantly faster timeline than how long it would take to process a conventional bank loan.

Popular Bank

Similarly, New York-based Popular Bank announced a partnership last year with Biz2Credit, an online lender serving small businesses. Popular Bank leans on Biz2Credit’s technology to digitally process loan applications outside of regular bank hours, effectively speeding up time to funding.

As the lines begin to blur between online and brick-and-mortar banks, business owners may find themselves with an increasing amount of digital opportunities. However, a demand for brick-and-mortar banking will likely remain. Small business owners who borrowed from an online lender reported feeling less satisfied than those who borrowed from a community bank — 49% vs. 79% — according to a Federal Reserve survey.

“Whether consumers turn to online only banks, or traditional banks that offer online products and services, the availability of online options will more than likely continue to grow,” Coleman said.

Which bank is best for your small business?

Whether you choose an online bank or a brick-and-mortar bank to house your business funds would depend on your personal preference, Coleman said.

No matter which you pick, make sure the Federal Deposits Insurance Corporation insures your bank of choice, he said. Single consumer accounts, joint accounts and business accounts, among others, would be protected at FDIC-insured banks in the event of bank failure. Deposits up to $250,000 should be safe and covered.

If you like having the ability to sit down with a banking professional to discuss your business needs, a branch-based bank could be the better choice, Coleman said. The physical presence that traditional banks provide could add a level of trust and reassurance. Keep in mind, though, that most locations have standard business hours that may not be conducive to your schedule as a business owner, he said.

A digital bank would allow you to complete your banking activities on your own time, said Coleman, though traditional banks oftentimes provide online services as well. He also noted that you may want to avoid using a public WiFi network to make business transactions, as those networks may not be secure and your information could be vulnerable.

A digital bank wouldn’t offer the same in-person service as a traditional bank, Coleman said, but you may not feel like you’re missing out.

“If the business owner already knows what they are looking for in a bank, and the online bank meets their needs, then they may prefer the online bank for its convenience, potential lower fees and higher interest on deposits,” he said.

All business owners should at least consider opening a high-yield savings account for cash that isn’t needed for daily operations, Melick said.

“Small businesses need to make sure that every penny they make works for them,” Melick said. “Oftentimes, the best way it can is through online banking accounts.”

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Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]