Ways That Small Businesses Get Ripped Off by Banks

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Bank offerings for small businesses are often scaled-down versions of products and services designed for global corporations. Deposit-account features, treasury services, and credit products may not be relevant to your business's unique requirements. The disconnect is exacerbated by financial-industry definitions of small businesses according to annual revenue, often classifying independently-owned retailers with sales of $1 million or less in the same category as those producing $50 million each year.

The one-size-fits-all mentality may be costing you money. As a small business owner, you'll need to make sure that gaining access to a full suite of financial services (or your banker's desire to land a business account) doesn't dampen business profits.

Pay attention to the following areas, which you may consider either clumsily-designed financial packages with superfluous services or pure-and-simple rip-offs.

Account Analysis Fees

Small businesses that are eligible to receive a broad range of banking services are often placed on account analysis. Fees from services provided by various departments are aggregated and, theoretically, offset by credits associated with interest earned on account balances.

The credit for which your business qualifies may be substantially less than the reasonable customer may calculate. Account balances may be adjusted for bank reserves, which include percentages mandated by the government as well as those dictated by bank policy.

Banks may also reduce balances or generate charges associated with "float," which is especially troublesome for those companies who manage cash prudently but tightly. In this scenario, your account balance may be reduced when your company initiates a payment, not when the payment clears. (For example, if a check cleared on Day 10 of the month, the bank may presume that the check was generated on Day 5, mailed or transmitted on Day 6, and presented for payment on Day 9 so that — according to the bank — money should have been available to fund this transaction on Day 5. If the account balance would not have supported this payment, then the bank reduces the balance eligible for interest or generates a charge for extending a short-term loan.)

Ask for a statement if your bank doesn't automatically provide your business with the analysis portion attached to the monthly invoice. Review fees for standard maintenance, specialized services, volume-based transactions, and overdrafts along with any credits for balances. Scrutinize details to make sure that your business is not paying for unnecessary services. Note trends to determine if higher balances are rewarded with statement credits.

Delayed Posting of Deposits

Some banks tend to wait to make funds available for your business's use. This practice can cause a couple of problems:

1. Your business won't earn interest until the funds are officially released and posted to your account, reducing the potential for offsetting service charges
2. Your business may incur overdraft fees because funds to cover vendor payments are not available.

Ask your banker about policies regarding the release of funds. Probe to discover the types of deposits that may be held longer than expected, such as out-of-town checks. Understand that tellers may make decisions to hold funds to prevent fraud.

When you or your employees make deposits, review receipts for information to determine when funds will be made available. If funds are to be held longer than usual, speak to the manager about the rationale behind this decision and request that funds are released according to a more reasonable schedule.

Low Interest Paid 

Banks may charge 6.0% interest for a loan but pay your business 0.25% on a deposit account.

Hold as little cash as possible with your bank. Use cash to claim early-pay discounts and boost your profit margins instead of earning a minuscule amount of interest. Avoid borrowing money, and find ways to use working capital to grow your business. (See this article on managing finances to support growth.)

Overpriced Products and Services

It's common knowledge that paper checks can be purchased from a third party for a fraction of the price that the bank resells these products. Fees for other services, such as charge-card processing, receipts of payments from customers outside of the U.S., and e-check capabilities may also be higher if delivered by your bank rather than an outside provider.

Compare monthly fees and transaction charges among bank and non-bank service providers. Find reliable, inexpensive sources of financial services, and sign up directly with vendors.

Too-Restrictive Loan Covenants

Banks may place covenants on loans that are reasonable (that is, set standards for company financial performance that indicate stability and effective control of finances). They may also create situations that may too readily trigger loan defaults.

Scrutinize bank requirements and negotiate loan covenants that are achievable.

Conventional wisdom says that establishing a relationship with a bank now will reap rewards years later. Bankers may be interested in historical performance, but they also have to focus on selling to profitable companies today. Look for a mutually beneficial relationship in which products and services are designed for your business's needs.