Best Banks for Funded Startups

Every startup founder must decide early in the company’s existence when to open a business bank account. You really need to do this as you are getting funded; you should not wire investor money for your startup into a personal bank account. Going forward, after you are funded, all company expenses flow through business accounts, and no personal expenses go through the business. Kruze’s founder, Vanessa Kruze, CPA, breaks down when to open a bank account for your startup:

At what point should you create a company bank account and start with quickbooks/accountant for your startup?

More detailed question from a founder:

“Using personal savings and CCs to pay for services now. Will Inc. (c corp) soon but don’t plan to monetize right away,or only get a little $ in early on. At what point should I create a company account and put some of my savings in, start using QuickBooks, talk to an accountant? Right after I inc.?”

Vanessa’s response:

Incorporate as soon as you start spending a material amount of money on the idea, begin signing legal agreements, and before you start hiring contractors or employees. Get yourself protected legally.
If you are going to raise real Angel and VC capital, then incorporate as a Delaware C Corp. VCs can’t invest in LLCs and S Corps, so if you go that direction you will need to reincorporate later. Btw, LLC and S corp structures are great if it’s a family owned business and you will not be raising VC capital. In fact we are an S Corp.
Once incorporated, you can get a separate bank account. If you raise any funding at all, even pre-seed funding, get a business bank account for the company. Do that immediately. You want to clearly document all spend on the new business. And make sure you get a bank that knows startups, not some random regional bank or mega-bank. Very few banks understand VC-backed businesses. (Read our tips on how to read a bank statement.) This matters for a few reasons. 1. Most small business-focused banks don’t “get” the fact that tech startups burn cash. You don’t want them putting you on some internal watch list because they think you are going out of business. 2. The right bankers are very connected to venture capitalists and can make introductions to potential investors.
When you have the bank account, use only that account for the business. Do not mix personal and business anymore. Founder to Business payments are something the IRS focuses on in an audit. So do it right.
When you’ve raised some money, you can get a real startup corporate card. Look for a card that does not put personal liability on the founders. Also look for cards that “get” startups. We are currently recommending Brex as the best credit card for startups.
Once all the spend is segregated, you can wait a bit before doing QuickBooks. However, if you want more granularity and/or you have investors, then use QuickBooks. This is probably the time to hire a startup accountant like us.
We encourage companies to raise about a quarter of a million in pre-seed, seed, or venture funding before working with us because anything less means you are on a really tight budget and that capital could be better used for achieving product-market fit. We can always go back and clean up compliance and accounting, but you don’t always get a second chance at traction.

Most VC-backed startups we work with now have two banks. After the SVB crisis, the median number of banks our clients work with went to two from one, and we are seeing VC term sheets that request that the startup use two accounts.

This is a big change from what we saw prior to the startup banking crisis. Founders used to pick a bank, and then basically forget about it until they were big enough to need a treasury function to manage the millions of VC dollars they had raised.

Why have multiple banks?

Having accounts at multiple banks gives startups a critical backup if their primary bank fails. The SVB crisis made this painfully clear. Founders who hadn't set up a second account in advance couldn't move money out fast enough before the FDIC stepped in and froze their funds.

Secondly, having an additional bank means that a startup can get double the FDIC coverage limit of $250,000. In a perfect world, it’s not a bad idea to park at least one month of payroll in a second financial institution, so if another financial crisis occurs, you’ve got enough cash to pay your employees for the coming month.

Third, many of the supposedly safest banks like JP Morgan or Wells Fargo don’t have the best banking interface or infrastructure for startups. So having an operating account with a more nimble bank, and then a safety account with a too-big-to-fail bank makes a lot of sense.

Of course, startups with only a little cash may not have enough to effectively have two financial institutions.

As the startup grows, one bank account is rarely enough. Separating funds across multiple business accounts can help founders understand the company’s finances more easily and help them make better decisions. Important reasons for having multiple accounts include:

• Operational segmentation. Keeping funds in different accounts makes it easy to grasp a business’s financial status. This kind of clarity is important when you’re calculating the amount of runway you have or deciding when to fundraise.
• Tax preparation. In addition to having an account for sales tax collection, many startups have an account for income taxes, making it easy to set funds aside to pay quarterly or annual tax bills.
• Managing expenses. Having an account dedicated to specific expenses makes it easier to monitor and track spending.
• Security. Putting funds in different accounts for different purposes minimizes the risk of fraudulent transactions, since no single account has access to all of the company’s funds.

In addition to having multiple accounts, tech startups should consider having multiple banks. As the bank failures in 2023 illustrated, it’s a good idea to allocate your funds to more than one bank for several reasons:

• FDIC insurance. FDIC insurance only covers $250,000 per depositor, per account type, per bank. Insured sweep accounts can spread your funds across a network of FDIC-insured banks in increments of $250,000.
• Business continuity. Holding funds in a second institution helps ensure that if your primary bank faces issues, you can access and move funds from another bank.
• Income maximization. A startup should keep approximately 12 months of runway in highly liquid accounts, but if your company has more cash on hand, you may want to consider placing the funds in accounts that generate higher yield.

There are no hard or fast rules around how many accounts a startup should have, but there are some general guidelines you can follow. As your company grows, you’ll need more bank accounts, and startups in different industries need different types. With that in mind, we’ve created a tool to give you an idea of what bank accounts your startup may need.

As your startup grows, you’ll need additional bank accounts to more effectively manage your funds. This tool can help give you an idea of the number of accounts you may need based on the amount of funding your startup has, and the industry you’re in.

There are numerous factors that you need to consider when you’re building your banking stack, including your runway, your burn rate, the flexibility you need from your bank, the safety of your funds, the type of accounts you need to serve your customers, and much more. But the biggest variable to consider is how much cash you have on hand.

The larger your cash reserve, the more complex your banking stack needs to be. These are just general guidelines; you should discuss your specific requirements with your accountant(s) and your bank representative.

$250,000 or under. Very lightly funded startups can probably just have one business checking account. Capital preservation shouldn’t be an issue, since FDIC insurance will cover up to $250,000.

$250,000-$1 million. At this point, you will probably need two accounts, a business checking account for operational expenses and a second account to hold additional funds. Consider setting up your second account at a different bank, which offers you greater FDIC protection and protects you if there are issues with your primary bank.

$1 million-$10 million. This level of funding is significant, and startups should add more options to their banking stack. A credit card account helps you manage expenses. You should also consider a cash management program for funds that exceed the amount you need for the next 12 months. At current short-term rates, idle cash in a cash-management program can earn a meaningful yield, so funds you won’t need for 12 months shouldn’t sit in a zero-interest checking account.

$20-$30 million. At this funding level, your startup probably has a significant number of employees, which means you may need to create a payroll account, an income tax account, and possibly a merchant services account.

$30-$40 million. Other accounts you may need include accounts receivable and accounts payable. Startups doing significant sales should consider a sales tax account, where you can place the sales taxes you’ve collected until you remit them to the proper taxing authorities.

$40-$50 million. You should make sure funds are invested across a range of low-risk options. You will want professional cash management, and you should set up an investment policy statement that’s approved by your board of directors.

$50 million+. You’ve reached the point where you probably need to set up separate operating accounts for different business functions, like marketing.

Rising interest rates can affect startup bank deposits. Startups that have money in a bank account might earn more interest on their deposits, because banks generally pay higher interest rates on deposits when rates rise. However, if startups pull cash to move it into higher-yield investments, that reduces the bank’s deposit base. If a bank is locked into longer term assets like mortgages or longer duration T-Bills, it could face a liquidity crunch. This is partly what sparked the issue with SVB.

Before the SVB failure, most founders probably didn’t pay much attention to Federal Deposit Insurance Corporation (FDIC) insurance for their company bank accounts. Now founders are paying much more attention to where they’re placing their money and looking for safer ways to manage their cash.

FDIC insurance protects individual bank deposits up to $250,000. However, startups can have millions in venture capital, far exceeding the FDIC limit. Founders and CEOs need to focus on three tenets of cash management: safety, liquidity, and managing risk.

Many banks have developed Insured Cash Sweep (ICS) accounts that distribute your money across a network of FDIC-insured banks in increments of $250,000. Please note that while these accounts have been available for over 20 years, they’ve never been tested to see if the FDIC would completely reimburse losses.

Startups with cash balances that exceed their bank’s insured sweep limits may want to consider investing in short-term government debt. Companies can access short-term government bonds by purchasing them directly from the US Department of the Treasury, or by working with their financial providers to purchase bonds or invest in money market funds.

Money market funds invest in highly liquid short-term investments like US Treasuries. While not FDIC-insured, they are considered very low-risk and offer startups a high degree of safety for their funds.

As part of a loan agreement, many banks that lend to startups require the startups to keep a specified percentage of the loan in an account at the lending bank. There are two basic reasons:

• Risk mitigation. If the funds are held with the lending bank, that bank can monitor how the cash is used, or even take the cash if the startup is doing poorly. It’s called the right of offset.
• Making loans. Banks use funds on deposit with them to make other loans.

Deposit requirements are a standard part of loan agreements. While you can potentially negotiate the percentage of funds the bank requires for the deposit, you will need to keep funds in your lending bank.

• How to read your startup’s bank statement
• Checklist for moving bank accounts
• Negotiating how much cash a startup must keep in the bank
• What are insured cash sweeps for FDIC insured deposits?
• What are Demand Deposit Sweeps?
• What kind of bank account should a startup open?
• When should you create a company bank account?
• Startup cash management
• Market share blog