Facts About Small Business Interest Checking

For more than seventy years, small business owners couldn't earn interest on their checking accounts. That all changed when the U.S. House of Representatives repealed that law in July 2010. Now, a year later, that amendment could change the way your small business handles demand deposits.

No Requirements

The amendment that permits small business interest checking does not require banks and credit unions to offer interest; it simply gives them the option. Interest rates are currently very low, so until the economy improves there might not be much of an issue.

However, once the banking industry recovers from some of the recent upsets, small business interest checking could easily become a reality. According to the New York Times, financial experts believe that one of the larger banks will be the first to offer interest on demand deposits, after which others will likely follow suit in order to compete effectively.

Higher Liquidity

Previously, there was no incentive for small business owners to maintain large balances in checking accounts. It's been common for those businesses to move money into interest-bearing investments instead, maintaining sufficient liquidity to cover overhead but not much else.

Although small business interest checking probably won't offer a tremendous return, it could encourage small business owners to increase their liquidity. Keeping more cash on hand can have both benefits and drawbacks, but it will certainly make the financial side of the business more flexible.

Balancing the Costs

Banks must earn a profit if they are to stay in operation, and small business interest checking will cut into their bottom line. Consequently, some banks (if not all) will attempt to balance those costs by increasing interest rates on loans or by charging higher maintenance fees. Experts tell the New York Times that banks will need to find some way to balance out the expense.

Of course, small business owners will be able to make their own choices about how they bank, and may be able to avoid those extra costs. For example, it is possible to maintain a small business interest checking account through one institution, and to obtain loans and other instruments through another institution.

Changes Afoot

Lawmakers felt that the ban on small business interest checking inhibited small business owners and created inequality in the banking industry. Whether the repeal will have any lasting impact on small business owners as a whole remains to be seen, but in the next few months we might see more options open up.

Source:

Interest Checking for Small Businesses, NY Times