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As a virtual CFO, I have worked with a lot of small businesses to improve their financial processes. A lot of Entrepreneurs are so busy working in their business versus on their business, they make some common banking mistakes that can hurt their business. The following are five common banking mistakes that I have observed and are easily fixable.
1. Banking Only at One Bank: It is easy for a small business owner to utilize one bank and perform your banking activity through that one institution. However, this can have ill side effects. When it comes time for a loan and your bank denies you, if you don't have a relationship with another bank, you could be out of luck. Secondly, you should make banks compete for your business and shop around for the best deals. You need to have a good handle on what your money management needs are to get the best deal for you. Thirdly, if your business is with a small bank and you are fast growing and needing financing, you could outgrow the one banks ability to finance you by hitting their exposure ceiling.
2. Failing to Focus on Collateral in Loan Application: When you are submitting a loan application, you may be asked for an executive summary. Make sure that your executive summary focuses on why you are a good risk for the bank. Don't only talk about your growth opportunities Bankers want to know about the facts of your financial situation: your assets, liabilities, and what you can offer as collateral. See this post about bank loans.
3. Relying Too Much on Line of Credit: If you run your business primarily on a line of credit, as many entrepreneurs do, you may be setting yourself up for disaster if your bank decides to reduce or eliminate your credit line. This has actually happened to many small business owners during the current recession and they had difficulty to secure alternative financing. Try to wean yourself off your line of credit if at all possible by replacing it with other funding and have it available for emergencies.
4. Not Paying Attention to Bank Fees: Small business owners remember: Cash is king. You should avoid bank fees at all costs. Don't get too lax with your banking, even during those busy weeks and months. Because when you look back at your bank fees, you will realize what a hindrance they can become to your business if they are a recurring issue. Don't fall victim to these common banking practices of not maintaining minimum balances, overdraft fees, etc. This may mean you need to hire a part-time bookkeeper or a CPA. I have had clients that were able to pay a part-time bookkeeper just from the reduction in bank fees by properly managing the businesses cash flow.
5. Keeping Too Much Cash in Checking: I had several clients with very flush checking accounts. When I inquired as to why they kept such high balances, they were worried about bouncing checks and having time to move money around when they needed to do it. Many banks have some sort of Treasury Management Services or offer sweep accounts that enable a small business to earn interest while having funds easily accessible.
Avoiding these mistakes will help make you more financially viable.