A Geek's Guide to Startup Banking - What do you do after you close financing
This is my 2nd post in the “Geek’s Guide” series about all the things that entrepreneurs hate to do, are not good at doing them, but have to do them anyway. These things include office space (My first post is on this topic), legal, HR, administration, banking, accounting, insurance, payroll, etc.
I am going through these things myself at Yottaa. This is my 2nd time in going through these things. My first time was around 2000 to 2001 when I started Nexaweb. Nobody was doing blogging at the time. Frankly, I wish I blogged about what I learned at the time. Because when I need this knowledge again, I remember absolutely nothing about these things. —We are genetically programmed to suck at such stuff and our memory got erased quickly even if we force ourselves through a learning process.
Anyway, through Yottaa, I think that I’ve become a semi-expert in these things now. I’m determined to write down what I learned so that they might be useful for my fellow entrepreneurs. This post focuses on banking.
What is the first thing you should do when you close financing? Well, even before the unbelievable party that you are going to throw:-), you’d better have a bank account that you can deposit the money. How are you going to do that? The followings outline the considerations you should think about from a banking point of view.
- Account types: banks offer many types of accounts, ranging from checking accounts, simple saving account, and money market account to more sophisticated investment accounts. It is helpful to know the differences between these account types.
At minimum you need a checking account which permits unlimited transactions in and out. But checking accounts do not bear Interest. Interest bearing accounts include saving accounts, money market accounts and so on, but they only permit a limited number of transactions per month. For example, saving accounts only permit 6 transactions per month by legal regulations.
- Liquidity vs. investment: The money you raised will be consumed over a period of time. During the period, you want to make sure that cash is available when you need it. On the other side, it also makes sense to consider some form of “investment” for the portion of your cash not needed initially.
There are many forms of investments banks offer, ranging from simple saving accounts, money market account, CD account, to even more sophisticated ones. Different type of investment service has different risk/reward profiles. For example, simple saving accounts are the safest (insured by FDIC), liquid, and yield interest but the current interest rate is very low (0.25% for example). Money market accounts are not FDIC insured but they are safe as long as the bank itself is safe. Monday market accounts provide liquidity and offer better interest rate than simple saving accounts. CD accounts may offer even higher return but typically require you to commit to a certain period of time (6 months minimum, typically 12 months), during which there is no liquidity.
The common choices for startups I have seen are to stay with simple saving accounts or money market accounts.
- Banking fees: banking services normally charge fees. Such fees are part of the banking cost that you should take into consideration. Most banks may waive such fees if you maintain a certain level of account balance.
Some banks give you “earning credit” for your checking account balance. “Earning credit” is different from “interest” that does not generate additional cash, but can be used to offset some of the banking fees. If your balance reaches a certain level, you could have enough earning credit to offset all your banking fees.
- Online banking service: Most banks provide online banking service that you access and manage your accounts from a web browser. Nevertheless, it is still a good idea to check it out to make sure such service is available.
- Do you need equipment financing or loan from the bank? Most banks do not offer equipment financing or loans to startups (they typically require a long credit history, revenue, etc in order to be considered for loans). The only exception is Silicon Valley Bank (SVB). Even SVB is nearly impossible to get a loan for young startups, but they at least offer you a glimpse of hope.
- Do you need international banking? This one is tricky as it highly depends on local regulations. You would most likely choose another set of banks in the other country. In Yottaa’s case, we need banking in China because we have a team in Beijing. Fortunately, Bank of America provides banking operations in Beijing so my life is slightly simpler (Still work in progress. After a few weeks, I have not been able to move capital yet. So I’m very much homeless in Beijing:-) Any tips would be appreciated!).
Which bank should you choose? It depends on what you need. In my case (for Yottaa), I evaluated a few banks and eventually picked Bank of America. There is no way that Yottaa can get a loan from them, but it is ok because Yottaa does not plan to get a loan. The other attributes of Bank of America make them look like a better choice for Yottaa(lower fees, better service and engagements, international presence, I love their account service team, etc).
Coach Wei is the CEO of Yottaa and Founder & Chariman of Nexaweb. This blog post was originally published on November 23, 2009. You can find this post as well as additional content on his blog called: Dijital Life.