Managing finances is a complex and high-stakes task for small business owners, and support can be one of the toughest challenges they face when first building and scaling. That’s why many of them turn to an institution they trust. According to a survey from the NFIB Research Center, over half of small business owners (56%) use the same Financial Institution for their personal and business accounts, and 76% of small businesses prefer to keep their business accounts in a Community Bank or Credit Union.
This is great news for Community Banks and Credit Unions trying to attract more small businesses, though it does present some challenges. Understanding this interplay is crucial for addressing risks and unlocking opportunities to serve more small business clients more effectively.
The Network Effect: Personal and Business Accounts
Prioritizing small businesses can dramatically increase profitability for Community Banks and Credit Unions. These accounts are 4–6 times more profitable for Financial Institutions than retail accounts, and they bring in three times more deposits. Small businesses bring in an additional 2.3 times more deposits when the relationship extends into lending. These numbers demonstrate the extreme significance of bringing in small business clients. And there’s no better way to do that than by reaching out to existing customers and members who are also small business owners.
Intermingling business and personal accounts at the same Financial Institution creates a network effect that can benefit Community Banks and Credit Unions. When financial institutions cater to the dual needs of business owners and their employees, it deepens customer loyalty and engagement.
For example, by offering integrated solutions that simplify transfers between personal and business accounts or consolidate statements, Financial Institutions make it more convenient for small business owners to consolidate their banking. Unified digital banking platforms can be particularly valuable, bridging the gap across account types.
Community Banks and Credit Unions have an undisputed edge when it comes to building client relationships and getting to know their customers and members. Most of these institutions still operate with a high-touch, relationship-driven approach, where a banker works with clients and members through one-to-one conversations. Forging these types of personal relationships with individuals can foster trust, leading small business owners who already bank with a Community Bank or Credit Union to choose the same Financial Institution for their small business banking needs.
Risks Associated with Commingled Accounts
Even with the many benefits of separating personal and business accounts, many small business owners use one account for both personal and business needs. This commingling of personal and business finances presents significant risks for both the small business owners and the Financial Institutions they trust. Let’s explore a few common challenges.
Challenges for Financial Institutions
Difficulty in Assessing Financial Health: Financial statements may not accurately reflect the business’s performance, complicating lending decisions or other financial assessments.
Increased Risk of Default: Without clear financial separation, evaluating a business’s cash flow and repayment capacity becomes harder, increasing the risk of loan defaults.
Compliance Issues: Regulatory requirements may demand a clear distinction between personal and business finances. Commingled accounts could lead to compliance challenges for financial institutions.
Challenges for Business Owners
Legal and Tax Implications: Blurring financial lines can jeopardize the limited liability protection offered by certain business structures. Personal assets may become exposed to business liabilities. Additionally, tax audits can become complicated, with owners struggling to prove legitimate business expenses.
Operational Inefficiency: Without separate accounts, tracking business performance becomes cumbersome, leading to potential mismanagement of resources.
Reduced Access to Credit: Commingled finances can make it difficult for lenders to accurately evaluate the business’s creditworthiness. This lack of clarity may lead to challenges in securing the loans or lines of credit needed for growth.
Opportunities for Community Banks and Credit Unions
Fortunately, there are ways to address these challenges and maximize opportunities. Here are some proactive strategies Community Banks and Credit Unions can adopt to better cater to the unique needs of small business clients and help them keep their personal and business accounts completely separate.
1. Education and Awareness Campaigns
Financial literacy is key to helping small business owners understand the importance of maintaining separate personal and business accounts. Financial Institutions can host workshops, webinars, or one-on-one consultations focused on topics such as navigating tax and legal considerations for small businesses, strategies for efficient financial management, and the benefits of keeping separate personal and business accounts.
2. Tailored Financial Products
Designing products specifically for small businesses can encourage proper financial practices. For example, incorporating value-added features to business accounts, like integrating with accounting software or offering expense tracking tools, can encourage small business owners to open a separate account for their business transactions. Additionally, offering flexible credit solutions tailored to small businesses' unique cash flow patterns can encourage the separation of personal and business accounts.
3. Enhanced Customer Support
Small businesses often face unique challenges that require personalized attention from a Community Bank or Credit Union. Offering dedicated small business banking teams or relationship managers can help address small business financial concerns or challenges promptly, provide tailored advice based on a business’s unique situation, and build trust and loyalty between the small business owner and their Financial Institution. Tools like Crux Analytics can provide tailored insights that help Community Banks and Credit Unions start conversations from the point of knowledge so they can get to the heart of the challenges facing a small business and offer solutions.
4. Technology Integration
On average, Community Banks and Credit Unions invest $5–$10 million a year (or 6-7% of revenue) on technology. While much of that budget has historically been dedicated to mission-critical core banking and digital banking technology, Financial Institutions have begun investing more in (up to 32% of their technology budget) into data analysis platforms. The role of technology in banking continues to shift as next-generation cores become specialized connectors, rather than monolithic engines powering everything, allowing Bank and Credit Unions to customize their solution mix to enable faster growth. It’s essential to proactively re-evaluate tech stacks on a regular basis to assess where new technologies may accentuate strategic initiatives and improve banking outcomes, and whether old technologies are still driving value. Platforms like Crux Analytics are making it more effective, efficient, and low-risk for Financial Institutions to drive relationships that increase profitability and growth.
5. Proactive Risk Monitoring
Implementing systems to monitor potential risks from commingled accounts can help mitigate issues before they escalate. Some examples include regular account reviews to identify unusual transaction patterns, offering alerts or recommendations when a comingled account is detected, and proactively engaging with clients to educate them about the risks associated with commingling accounts. One key aspect of pre-empting small business risk is understanding how shifting market forces on a hyper-local level directly impact each business in a portfolio. Comingling of personal and business finances can mask cash-flow issues until it’s too late, so being able to efficiently assess the expectation vs reality of a business account, based on changing market conditions, can help give bankers a complete picture to mitigate future risk.
Conclusion
The intersection of personal and business finances in small businesses presents a complex yet rewarding opportunity for Community Banks and Credit Unions. By understanding the risks of commingling accounts and leveraging the network effect, Financial Institutions can position themselves as indispensable partners to their clients and attract more small business customers and members.
Crux Analytics helps Community Financial Institutions achieve better relationship outcomes across their small business base by increasing ROA and lowering risk. Contact us today to learn more about how our platform can benefit your Financial Institution.
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