08/01/2017
The Finance Diva's Business Tip:
Did you know that your business (and personal) banking account has a rating/grade? Of course it does but they (bank underwriters) won't tell you that.
Why do you think tiered accounts exit? They weren't created, initially, to get extra revenues in monthly fees - this happened as a result of consumers wanting better benefits associated with their deposit accounts even though they didn't "qualify" for that type of account.
Did you know that before the housing bubble, which caused several major banks to collapse, you could not get a tiered account unless you "qualified" for it, you couldn't pay extra to join that level. After the housing market crashed, many banks were forced to reevaluate new ways to earn extra income and now you can have a tiered account and you can have a tiered account, everyone can have a tiered account IF you pay for it. *Now that I think about it, that's right around the time everyone started offering secured credit cards too* I ain't knocking the banks for being creative with earning more revenue, I'm side-eyeing all of you who buy into it!!!
So back to how banks grade/rate your business accounts...here's the ☕...
Your business bank account is the MOST important financial tool you will use to manage your company's financials - and if you aren't using a business bank account to manage your financials, YOU ARE NOT A BUSINESS IN THESE HEAH UNITED STATES!!! All financial operations should flow through a main business checking account like: deposits, accounts receivable, accounts payable, payroll (even if you are a sole proprietor or single member llc), savings, etc. Your business checking account is there to ensure that your business financials are kept separate from your personal. THEY SHOULD NEVER BE CO-MINGLED 👈👈👈 Honey this is a dead giveaway that you don't know what you're doing in which case you need to
Now I know I've discussed the importance of personal credit and business credit BUT bank rating is just as important as the other two. Unfortunately A LOT of business owners suffer in all three areas and that's why no one will lend you money including your own friends and family.
Here's the 5 things you need to focus on to build a solid bank rating:
1. Establish bank history. If you are only using Square, PayPal etc to accept payments, you are limiting your funding options. If you can't get a business bank account bc you are in Chexsystems or Early Warning Services, you should have taken care of that FIRST before trying to open a business where you expect someone else to pay you when you owe others!!!
2. Maintain a healthy balance rating. This is where the tiered accounts come into play. Your balance rating is derived by the your average minimum balance maintained in your business bank account over a three (3) month period. A $10,000 balance will rate as “Low 5″ - I won't break down the other ratings bc if you are not at a "Low 5" balance rating, most banks will assume your business has little ability to repay on a loan or a line of credit.
3. Show positive cash flows. Your business' cash flows are what's left after all expenses have been paid. If you have merchant account loans, inventory loans, purchase order loans etc and you continuously repeat these types of loans, you are NOT solvent and more importantly cannot manage cash flows so you are disqualifying your business from other forms of loans such as SBA 7(a) and lines of credit.
4. Manage your accounts responsibly. Just like a 30 day late can severely damage your personal credit score, an NSF can ruin your bank rating. Add overdraft protection for emergency situations but NEVER allow a NSF to happen. The fee that the bank charges for that NSF is not the only penalty you will incur.
5. Maintain a positive bank rating cycle. Each bank rating cycle is based on the previous 3 month balance rating. *If you've applied for any type of high interest loan like the ones I mentioned above in #3, they will ALWAYS ask for your business bank statements in multiples of 3 bc they are gauging your trends vs the industry you are in and setting your terms, amount and rate based on it. If you are handling business properly by following steps 1 - 4, you will have no issues with maintaining a positive bank rating cycle. Before you decide to apply for business credit, at least make sure your current business' bank rating cycle (last 3 months) is at a "Low 5".
