Banking for Startups

As an entrepreneur jumping into the deep end and starting a business, one of the earliest actions you need to take once you form a corporation to “house” your fledgling business is establishing a banking relationship to conduct financial transactions. What does that look like for a startup?

As background, I do know something about banking. Immediately after college, I spent three years working for one of the biggest money center banks in the U.S., including stints in business banking (aka business lending), private wealth management, bank mergers and acquisitions, corporate cash management, and more. Later, as an entrepreneur/startup CEO for more than five startups, I engaged in various banking relationships. That career background means I understand both the needs of banking institutions and the needs of startups.

While banking for a startup resembles personal banking, some critical differences should shape your early decisions. In an early-stage startup, your priorities will likely be minimizing costs while making sure you have access to the banking services you need, such as:

• A core transaction account where you can keep your startup’s money and use it to pay bills (via check, ACH, or wire transfer). Typically, this is a business checking account, and you will need your business incorporation papers to open the account in your business name.
  
  
• Ability to receive no-fee wire transfers from investors and potentially customers. The best business checking accounts will not charge you a fee to receive incoming wires and will give you excellent online visibility on when they arrive so you can let those investors know you received their money!
  
  
• Ability to use ACH to pay bills electronically. It is often cheaper and more convenient to pay via ACH via a bill pay portal that your bank supplies. It is extra helpful if the bill pay system can handle things like allowing electronic approvals of outgoing payments by another person in your organization.
  
  
• Online portal for managing your funds. Easy-to-use online access will prove to be very useful for day-to-day transactions, however, sometimes it is essential to access a bank branch. An example of when I needed a branch was when I needed to transact business with high dollar amounts, like depositing $50,000 investor checks. To avoid fraud, many online services limit the amount you can deposit or withdraw, which can put a crimp in your financial style.
   
• Business Credit/Debit Cards. The ability to buy stuff you need online or use while traveling on business often hinges on having a business credit or debit card for payments. Sometimes, your primary bank can offer an attractive business credit card or debit card product tied to your business bank account. Keep in mind that as you grow, you may need to provide several payment cards to support, monitor, and manage employees who need to be able to spend. If you expect to need to do that for your business, keep an eye out for programs that provide sophisticated support for such needs. Remember that the interest rates on true credit cards are extremely high, so avoid using a credit card as a funding source

• Ability to Earn Interest/Dividends on Business Savings/Money Market Account/Laddered CDs: If you have some financial resources (from a grant or some investment), you will want to take minimal risk while still having your money work for you by earning interest/dividends. Remember that your core business is not investing, so steer clear of the stock market and other risky investments, but do look for opportunities to earn interest on temporarily excess funds while ensuring that you have easy access.

Here are some additional tips for successful startup banking:

Begin to Set Up Good Internal Controls 

Make sure that it is not easy to transfer money from your business bank account to your personal bank account, which sometimes happens when you have both business and personal accounts at the same bank. While many small businesses are just extensions of an individual’s personal financial circumstances, if you will be taking investments from angels, venture capital funds, or government sources, it is crucial to establish and respect how money flows into and out of the business. That means making sure some approvals are required for moving money between the business and your accounts. 

As soon as your team is large enough (like more than just you), establish a pattern where you have someone else involved in either preparing, approving, or signing any transactions between you and the company. This is the most basic layer of separation of duties and tends to encourage good financial practices that avoid fraud and build investors’ confidence.

Be Smart About Fintech Startups that Target Entrepreneurs

Note that there are various fintech startups out there trying to make life easier for entrepreneurs. Before you buy into all of their marketing about how wonderful their services are, remember that usually, these startups are not banks themselves (the banking regulations in the United States are quite robust and demanding!) and, therefore, will be partnering with a bank(s) to provide whatever services they are doing. This means that you are introducing a layer of complexity between you and the actual bank that is handling your money.

A layer of complexity between the service provider and their partner bank(s) can create issues at inconvenient times. For example, one startup could not receive and post same-day wires (despite the promises on the service provider’s website!) when closing their first round of funding. Another startup discovered that the early-stage fintech startup serving them did not have all the bugs worked out of their software, and their interface with their banking partner kept going down. Talk about distracting!

If you are going to use one of these services, ensure they have a strong track record over a substantive period and get good reviews from their customers rather than being the guinea pig for testing their developing product. Check references. Make sure you have a backup bank, especially one of the big, well-established business banks, in place before you close a fundraising round to receive your wires so you do not undermine your new investors’ confidence right out of the gate.

Remember that Lending to Startups Usually Requires a Personal Guarantee – And That May Be a Bridge Too Far

Like law firms, banks often want to establish relationships with small companies early because they know that such relationships are “sticky.”  However, despite advertising that loans and equipment financing are available, such financial products typically are not available to startup companies with less than a few years of substantial revenue to demonstrate the required cash flow to service the loan.

Therefore, it is common for banks to ask for a personal guarantee from the founder. A personal guarantee means that you are personally on the hook (think the second mortgage on your house!) to pay the loan or lease if your business goes under. Given how fragile startup companies are, I have never agreed to personally guarantee a loan to the business, especially if I am taking on investor cash, which starts to make the business much more distinct from my personal financials (remember your investors can fire you and getting out of that personal guarantee might not be possible!). Remember that, as another type of loan, sometimes business credit cards can also come with a personal guarantee requirement!

What this effectively means is that a startup must be pretty mature before banks become a legitimate source of financing, so do not waste lots of time filling out applications and such when simply asking upfront if a personal guarantee is likely to be required will often make clear that this is a waste of your time.

Diversify Your Banking Relationships 

Remember the Silicon Valley Bank (SVB) debacle in 2023? SVB tailored its services to startups but, in doing so, took on enormous risks that were hard to see. Because they were the only bank that would lend to riskier startups (and even that was at a later stage than entrepreneurs would dream of), they were also able to demand that their customers keep “all” of their money with them (remember that banks make money off of both deposits and lending). That meant their customers weren’t diversified enough on the banking front when SVB got in deep trouble.

The bottom line is that you do not want your deposits in any particular bank to exceed the FDIC deposit insurance limit. Once you have a decent volume of commercial transactions and deposits exceeding the FDIC insurance limit, you should maintain multiple banking relationships so you have diversification and backup solutions if something goes wrong. Since the Silicon Valley Bank troubles, more options are available to help startups and other businesses to help solve this problem.

As a startup, remember that your innovation is probably not in banking, so stick to well-trodden and secure paths and partners for banking services so that you do not have to deal with problems in basic operational areas and can focus your attention on where you are creatively trying to make a difference!