Making use of a business bank account can provide your company with plenty of advantages, from providing relatively high limits to offering business loans and lines of credit.
At the same time, however, business bank accounts are inherently associated with risk.
Now, these risks shouldn’t scare you off – not in the slightest. Rather, being aware of them will allow you to monitor and keep track of them in such a way that you’ll be able to mitigate their potential negative effects.
It’s all about learning as much as you can and being aware of the possibilities so that you can do your best to protect your business.
What Are the Main Risks Associated with Business Bank Accounts?
Anything to do with managing finances is always going to involve some level of risk, so it’s unsurprising that business bank accounts do too.
These risks exist in different forms, ranging from those specifically related to things like credit and liquidity to potentially becoming the victim of financial crime.
Here are some of the most pertinent risks that are associated with business bank accounts.
Credit Risk
Credit risk is introduced when a company takes out a loan or lines of business credit. As soon as they’ve taken out the loan or lines of credit, they’re at risk of not being able to pay it back and potentially defaulting.
This would result in higher interest rates and bad credit scores and it could also impact the business’s reputation too.
So, before loaning money in any form, the company also needs to have a solid plan of how they’re going to pay back the money.
Fraud Risk
This isn’t always the case, but as soon as you open an official business bank account, you’re at risk of becoming the target of fraud and financial scams. This may include things like phishing scams, hacking, internal employee fraud and more.
These risks are always present no matter the type of bank account you’re using, but as soon as you have a business account in the name of your company, the risk does increase somewhat. While you can’t avoid the risk completely, what you can (and should) do is be super vigilant and proactive with regard to cybersecurity and make sure you implement strong internal controls.
Liquidity Risk
Depending on the size, type and health of your business, liquidity risk may be a factor you need to consider. That is, not having enough readily available funds – cash on hand – to cover your short-term obligations.
This would affect your company in plenty of different ways, but for startups especially – or any companies in a volatile situation – not having enough money to pay bank fees and more is something you need to try and avoid at all costs as it can be detrimental to your credit score.
Interest Rate Risk
It’s fairly normal for interest rates to fluctuate fairly often, but if they fluctuate dramatically, this can have very real effects on your business account. It can influence the cost of loans and credit lines associated with your account, and there’s not much you can do about that.
When interest rates increase, it becomes more expensive to borrow money, and if this changes unexpectedly or dramatically, it can have a serious impact on a company’s financial position.
Thus, when planning, it’s normally a good idea to try and look ahead at projected interest rate changes and sometimes, make plans based on slightly higher interest rates – just in case.
Currency Risk
If your company conducts any business in foreign currencies – even if it’s just a small component of the company’s operations – there’s always a risk that there will be significant fluctuations in exchange rates. This could negatively impact cash flow and the value of foreign transactions altogether.
But, if you work with a foreign currency, this is a risk you simply can’t get away from – it’s unavoidable. It’s just something to try and be aware of so that it doesn’t take you by surprise.
Counterparty Risk
Counterparty risk is one thing you really can’t control, but that’s why it’s almost more important to be aware of it.
It refers to the potential risk of the bank you’re working with for failing to meet its own financial obligations.
Of course, it’s not the most likely situation – especially if you choose a reputable and successful bank – but if the bank experiences financial difficulties or even collapses completely, account holders are at risk.
You can never completely eliminate this risk if you’re going to open a business bank account, but it’s always a good idea to try and keep an eye on what’s happening in the financial sector and keep tabs on how your bank is doing.
Compliance Risk
Having and using any kind of bank account involves a certain amount of responsibility and rule-following, and failure to do so will result in penalties of various types. But, in many ways, this is more extreme in the case of business accounts.
Account holders are expected to closely adhere to anti-money laundering (AML) rules, for instance, as well as all other types of blatant fraud. Failure to comply, report and more can have serious consequences, including monetary fines, frozen accounts or even reputational damage to your business.
To avoid this, always follow the rules (obviously), but make sure you familiarise yourself with all the regulations you’re expected to follow so you don’t accidentally slip up.
Operational Risk
Since businesses make use of technology, there’s always the possibility of them experiencing outages which can result in disruptions for you in terms of the use of their banking services. That could mean you aren’t able to perform certain functions, access services or even get to your funds immediately.
Depending on how long outages last, this could affect your business’s ability to process payroll, pay suppliers or meet a variety of other financial obligations.
Overdraft Risk
The risk of going into overdraft is always present – that is, the company overdrawing its business accounts, using beyond its means.
The result of this is that the account holder tends to be fined which can place unnecessary stress on the business owners and management.
If it happens often, it can also end up becoming a serious financial strain, as having to pay overdraft fees regularly can get expensive.
Dealing with the Risks That Come with Business Bank Accounts
It’s not possible to completely eliminate all the risks associated with having a business bank account – that’s just part of managing professional finances.
What you can do, however, is mitigate these risks in a variety of ways to make it less likely that you fall victim to their potential negative consequences.
So, be aware of all the risks and make the changes you can to decrease your vulnerability as far as possible. And, other than that, all you can do is try and deal with whatever fallout you experience in the best way possible – it’s part of business, after all.
