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Small businesses enjoy a lot of options when it comes to banking in the 21st century. But as digital-only banks grow in popularity, you may be wondering whether your small business should go with a traditional bank or turn to an online bank.
When deciding whether to use a traditional bank or online bank for small business banking, you should take into consideration things like customer service, interest rates, fees and access to bank branches and ATMs. Reviewing these and other factors may tip the balance toward one type of bank over another.
Online Bank vs. Traditional Bank
For a small business, one of the biggest concerns when you're looking at an online bank versus a traditional bank may be customer service. Unlike traditional banks, online banks don't operate branches where you can visit a banking professional to discuss your financial needs.
For instance, what if you want to go over lending options during a face-to-face meeting with a local banker? You can't do that at an online bank. Given that about 75% of small business lending happens at banks within 25 miles of the borrower, according to Goldman Sachs, borrowing from an online bank might not be so appealing.
On the other hand, some small businesses may be drawn to online banks because they offer low- or no-fee accounts and might hold a technological edge over their traditional competitors, among other benefits. Here's how the two options stack up.
| Online Banks vs. Traditional Banks | ||
|---|---|---|
| Online banks | Traditional banks | |
| Customer service | No in-person customer service | In-person customer service at branches |
| Fees | Often provide low- or no-fee accounts | Often charge account fees |
| ATMs | Potentially limited access, possibly resulting in more fees | Typically wide network of ATMs |
| Cash deposits | Cash deposits may not be available or may be limited | Widely available |
| Insurance | Insured by the FDIC | Insured by the FDIC |
| Minimum balance | Often no requirement for a minimum balance | Often requires a minimum balance |
| Interest rates | Generally pays higher interest rates on deposit accounts | Generally pays lower interest rates on deposit accounts |
| Product offerings | Often fewer product offerings | Often more product offerings |
Online Business Banking
When you do business with an online bank, you might rely much more on apps and websites than you do with a traditional bank. Why? Online banks don't operate branches. But some small businesses may be perfectly fine with little to no human interaction—from opening an account to getting a loan—in exchange for tech-enabled banking convenience and potentially fee-free accounts.
Here are some things to keep in mind about online banking for small businesses:
- Customer service: While online banks don't provide in-person access to customer service, they typically do offer customer service by phone, email or chat.
- Fees: Because they don't operate branches, online banks tend to have lower overhead costs. As a result, they may offer low- or no-fee accounts.
- Minimum balance requirements: Online banks might not require a minimum balance for an account, while traditional banks might have that requirement.
- Withdrawal limits: If you need to withdraw cash from your account at an online bank, you may be hampered by daily ATM cash withdrawal limits (this also applies to traditional banks).
- Tech capabilities: Online banks may invest more in advanced technology than traditional banks do.
- Merchant services: Merchant services such as credit card and debit card processing may be harder to find at online banks than at traditional banks.
- Credit cards: Some online banks might offer business credit cards, but the options typically are more plentiful at traditional banks.
- Loans: Business loans may not be available from an online bank.
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Traditional Business Banking
If you're seeking broader product offerings and more personalized service—particularly if you prefer face-to-face interaction—then a traditional bank might be ideal for your small business banking needs. However, the tradeoff may be that you pay higher account fees and must maintain a certain minimum balance.
Here are some of the things to keep in mind about traditional banking for small businesses:
- Customer service: One of the biggest advantages of traditional banks is that they provide in-person customer service at their branches.
- Fees: A number of traditional banks charge higher account fees than their online counterparts do.
- Minimum balance requirements: When you do business with a traditional bank, you might encounter minimum balance requirements that you may not find at online banks.
- Withdrawal limits: While traditional banks often have daily cash withdrawal limits, customers can jump over this hurdle by withdrawing money at a branch.
- Tech capabilities: Traditional banks frequently face criticism over technology that may fall short of tech offerings from online banks.
- Merchant services: Traditional banks may be better equipped to provide merchant services than online banks are.
- Credit cards: Traditional banks tend to offer a wider variety of business credit cards compared with online banks.
- Loans: Lending options at traditional banks may be more robust than they are at online banks.
How to Choose Between an Online and Traditional Bank
When you're choosing between an online bank and a traditional bank, consider these questions:
- What is the bank's customer service like? You may be comfortable with the lack of in-person customer service from an online bank. But if you'd prefer to lean on in-person guidance from a banker, then a traditional bank may be a better choice.
- How well-rounded is the technology? Online banks may supply more advanced technology to their customers than a traditional bank does. After all, online banks operate solely in a digital world. How much this matters to you can help dictate which banking path you go down.
- Do you anticipate needing a business loan? Your lending options may be limited at an online bank, while traditional banks dominate the market for small business loans.
- Do you want a business credit card? A traditional bank may issue an array of business credit cards, but an online bank may not have business credit cards in its product lineup.
- Are you fed up with fees? Account fees can chip away at your profits. If you'd like to escape banking fees (or at least high banking fees), then you might be better off with an online bank. Traditional banks generally charge higher fees than online banks do.
The Bottom Line
You should give plenty of thought to whether your small business entrusts a traditional bank or an online bank with your hard-earned money. After all, you want to do business with a bank that provides convenience, security and flexibility. Once you've sifted through the pros and cons, you want to bank on a financial institution that most closely aligns with your financial needs.