Jack Faris: Small Business Focus: Something Small Businesses Can Take to the Bank

Anytime the United States House of Representatives approves legislation by a margin of 424 to 1, that’s a clear indication that the lawmakers believe some aspect of American law should be changed. Such a resounding declaration occurred in May when lawmakers heeded small-business owners’ pleas to remove a 70-year-old ban on allowing interest payments for business checking accounts.

It will probably come as a surprise to many Americans that a law dating back to the Great Depression bars banks from making interest payments to business checking accounts. It certainly made Sarasota, Florida, entrepreneur Ed Pinto take a new look at an institution he had long regarded as a friend of small business.

Flabbergasted that such an archaic prohibition still exists, Pinto recently took his story to the U. S. Senate Committee on Banking, Housing and Urban Affairs in hopes that senators would join their House colleagues in passing the Business Checking Freedom Act H.R. 1224. The act passed in the House in two previous sessions of Congress with strong and significant bipartisan support.

Under current law, small-business owners are forced to choose between non-interest-bearing accounts and more costly “sweep” accounts, which require a much higher balance than ordinary checking accounts. Many small businesses do not have the financial resources necessary to maintain a “sweep” account, so they are forced to deposit their hard-earned cash in accounts that can’t pay one cent in interest.

“When the company was started,” Pinto testified, “I can recall my astonishment at being told that a business could not earn interest on a checking account.” He opted instead for an interest-bearing “sweep” account, which not only lacked Federal Deposit Insurance Corporation protection, but also came with high fees and confusing accounting rules.

“Sweep” accounts, Pinto quickly discovered, were not small-business friendly at all. They are specifically designed for larger companies that can afford in-house accounting professionals and have the financial staff resources necessary to track the flow of funds through a company’s multiple accounts.

Big banks have consistently opposed repealing the ban on interest checking for business accounts, Pinto said, “but in their efforts to insulate themselves from free-market competition, they’re hurting small businesses.”

Hurting small business is something Congresswoman Sue Kelly (Dist. 19th – N.Y.) says she won’t abide, which is why she reintroduced H.R. 1224 in March 2005.

“In our 21st Century economy, no American should be losing the option of earning interest on their own money simply because they own a small business,” Kelly said. “Yet our small-business owners across the country are unfairly losing potential interest income on a daily basis until the Business Checking Freedom Act becomes law.”

The act would not require banks to provide interest payments. It would merely remove the official sanction against doing so and give banks the option to offer such checking accounts to small firms.

Even the Federal Reserve supports changing the law. Senators now have an opportunity to vote on something that small businesses can really take to the bank.

–Jack Faris is the president of NFIB (the National Federation of Independent Business), the nation’s largest small-business advocacy group. A non-profit, non-partisan organization founded in 1943, NFIB represents the consensus views of its 600,000 members in Washington, D.C., and all 50 state capitals. More information is available on-line at www.NFIB.org.