Start a bank by following these 10 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your bank. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
Check out our How to Start a Business page.
STEP 1: Plan your business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a bank?
The costs are significant, since the banking industry is the most regulated industry in the country. Banks generally need between $12 to $20 million in starting capital. If you start a local community bank, you might be able to raise that money locally. Otherwise, you may have to solicit investors.
Once the capital is raised, you must apply to regulatory agencies. Regulators are strict in their review of applications since the financial crisis. Once you're approved, you may open up your bank.
What are the ongoing expenses for a bank?
Ongoing expenses vary. However, in general, expenses are 15% of non-interest expenses, with a median expense across the country of about $400,000 per branch.
Who is the target market?
Preferred customers are both individuals and businesses.
How does a bank make money?
Banks make money by taking in deposits and lending them out to other people or businesses. A bank's primary cost is the infrastructure they build, including buildings and labor costs. However, the basic function of a bank is simple. The bank must invest its money in such a way that they earn more than what it costs them to keep money on deposit.
For example, a bank may accept deposits from the general public and pay them 0.05% on savings accounts. They can then lend this money out to others at market rates. The difference between the 0.05% and the market rate is the interest "spread." This is the bank's profit.
Banks also make money by charging fees and offering other banking services, like business checking accounts, bank certificates of deposit, and money market accounts. Some banks also sell insurance.
How much can you charge customers?
You can charge customers for opening and maintaining a checking or savings account. The type and amount of fees vary, as well as how they are charged. Some banks have minimum deposit levels, while others charge monthly service fees that range from $5 per month to $100 per year unless a minimum balance is kept in the account. Most banks charge fees for overdrafts. And then there are the service fees for printing account balances, doing wire transfers, and a performing a host of other services.
How much profit can a bank make?
Banks typically make between 10% and 15% net profit. Return on equity ranges between 7% and 10%. Some banks realize a strong return on equity in excess of 10%.
How can you make your business more profitable?
Consider setting up an expansive network of ATMs to bring in more income for the bank. Offer more services. Banks can do more than just bank, these days. Consider offering insurance and retirement accounts.
What will you name your business?
When registering a business name, we recommend researching your business name by checking:
- Your state's business records
- Federal and state trademark records
- Social media platforms
- Web domain availability.
It's very important to secure your domain name before someone else does.
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your bank is sued.
Form Your LLC
Read our Guide to Form Your Own LLC
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
Small Business Taxes
Depending on which business structure you choose, you might have different options for how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
You can learn more about small business taxes in these guides:
There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Additionally, learning how to build business credit can help you get credit cards and other financing in your business's name (instead of yours), better interest rates, higher lines of credit, and more.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank, credit union, business-loan friendly banks, one with many brick-and-mortar locations, and more.
Open net-30 accounts
When it comes to establishing your business credit, net-30 vendors are considered the way to go. The term "net-30," which is popular among vendors, refers to a business credit arrangement where the company pays the vendor within 30 days of receiving goods or services.
Net-30 credit terms are often used for businesses that need to obtain inventory quickly but do not have the cash on hand.
Besides establishing business relationships with vendors, net-30 credit accounts get reported to the major business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business Credit). This is how businesses build business credit so they can qualify for credit cards and other lines of credit.
Recommended: Read our guide on the best net-30 vendors so you can start building business credit now, so you never have to worry about cash flow in the future. Keep in mind that poor cash flow is the #1 reason businesses fail!
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
Federal Business Licensing Requirements
Banks must be approved for federal deposit insurance. Information on requirements and how to get approved can be found on the Federal Deposit Insurance Corporation website.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a bank. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Certificate of Occupancy
A bank is generally run out of a building or storefront. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a bank.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your bank will be in compliance and able to obtain a CO.
STEP 7: Get business insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
How to promote & market a bank
Marketing your bank is difficult. Regulation controls most aspects of what you're allowed to say and do. You could start by advertising in local newspapers and on local T.V. networks. Tell others in the community about your plans to start a bank. Send out direct mail pieces and fliers to invite people to your grand opening.
How to keep customers coming back
Offer competitive banking products and services. The banking industry is filled with uncompetitive or mediocre banks. Consumers demand lower fees and better customer service and aren't getting it from many of conventional, established, banks.
Find ways to innovate, lower fees and other costs, and make your banking services simple to understand and use.
Still unsure about what kind of business you want to start? Check out the latest Small Business Trends to help inspire you.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Using our website building guides, the process will be simple and painless and shouldn’t take you any longer than 2-3 hours to complete.
STEP 10: Set up your business phone system
Getting a phone set up for your business is one of the best ways to help keep your personal life and business life separate and private. That’s not the only benefit; it also helps you make your business more automated, gives your business legitimacy, and makes it easier for potential customers to find and contact you.
There are many services available to entrepreneurs who want to set up a business phone system. We’ve reviewed the top companies and rated them based on price, features, and ease of use.
Recommended: Find the best phone system for your business; check out our review of the Best Business Phone Systems 2021.
Start A Bank In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Is this Business Right For You?
Owning a bank is a demanding endeavor. It requires intimate knowledge of the banking industry and regulatory structure of the financial services industry. A banker needs to be good under stress, love working with numbers, and also working odd hours. While employees clock out at the end of the day, a bank owner may need to take his or her work home with them.
Want to know if you are cut out to be an entrepreneur?
Take our Entrepreneurship Quiz to find out!
What happens during a typical day at a bank?
Day to day activities of a banker include making loans, taking in deposits, and servicing bank customers. As an owner, you are also responsible for making sure the bank complies with all regulatory requirements. Banks are under immense pressure to turn a profit, so this means spending a lot of time underwriting good credit risks and figuring out where to put the bank's money so it will make a stable and reliable return.
What are some skills and experiences that will help you build a successful bank?
Bankers need to have good business sense and must be good with numbers. They are responsible for overseeing the profitability of the bank so having a degree in finance, business administration, accounting, or related field is helpful.
What is the growth potential for a bank?
Growth potential for a bank is huge. Banks can stay small or can operate as large commercial and investment banks. Some banks, like RBC Royal Bank and Steams Bank, offer franchise opportunities. But, you don't have to buy into a franchise to grow into a large national or international bank.
TRUiC's YouTube Channel
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Learn from other business owners
Want to learn more about starting a business from entrepreneurs themselves? Visit Startup Savant’s startup founder series to gain entrepreneurial insights, lessons, and advice from founders themselves.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a bank?
Hire someone with familiarity in starting a bank. This is a complex process which is controlled almost entirely by state and federal regulation. You must navigate a complex maze of regulatory rules and paperwork. And, the risks are high as regulators may deny your application to become a bank.
One idea for raising the capital (and support) you need is to start a small community bank first. Gain local support and funds from your community. This will show regulators you're a valuable member of the community you intend to serve.
How and when to build a team
Starting a bank usually requires a large staff. Plan on at least 10 employees for a small bank. Most banks have more than 20 employees working for them.