What are business bank accounts?
Business bank accounts are a type of current account that is only available to businesses. It enables you to separate your business transactions from your personal ones. It can be used for day-to-day transactions related to your business, such as purchasing goods or services.
Having a business bank account is a legal requirement for limited companies, but it can also benefit sole traders. You don’t need a separate account for work transactions if you run a general business partnership.
What you need to open one
You’ll usually need originals that you’ve received by post, not copies printed from the internet.
The following information is required to create a business bank account:
- ID verification
- Address verification
You may also be required to provide information about your company:
- Contact information for the business’s name and address
- Companies House Registration number (for limited companies and partnerships)
- Financial status
- Estimated turnover
Your Companies House registration number can be found by searching your company details on the Companies House register or on the incorporation documents you got when you established your business. It will also appear on other letters from Companies House, such as if your company’s registration address has changed.
If you are a sole trader, you will require a photo id, such as a driver’s licence or passport, as well as evidence of address, such as;
- A recent utility bill
- Financial statement
- Mortgage statement
- Council tax bill
- Correspondence from HMRC
Why you shouldn’t use a personal account
The quantity and amount of your business expenses will increase as your company expands. Using your personal bank account for these expenses may be recognised by your bank at some time. Your bank may insist that you use your personal account for personal expenses.
You can ignore this, but you risk having your account shut down by the bank. In addition, fees for personal and business accounts are often higher.
If you are a sole trader, you may be able to use a personal bank account.
A corporation or limited liability company (LLC), on the other hand, is a separate legal entity from its owner. That entity needs its own bank account to establish legal separation between the owner and the business, shielding the owner from legal liability.
How can they help you?
Business bank accounts can provide:
- Your account balance will earn interest
- A branch service where you can pay with cash or check and withdraw money
- Additional services
- An overdraft allows you to borrow money for a limited time
- A debit card with a chequebook to pay bills or make purchases. (Some banks will issue many of these so that more than one staff can help manage the account.)
- Online banking allows you to view and manage your account via your bank’s website or a mobile app
When it comes to submitting your tax returns, having clean and separate business banking will make a massive difference in your calculations. Making it considerably more accessible for you or your accountant to reclaim all of what you are entitled to. It also makes auditing a lot easier.
It looks more professional– Customers and suppliers may view your company negatively if you pay invoices from your personal account or ask customers to pay you directly.
Helps build business credit– Suppliers and lenders use business credit reports to decide whether to lend money to your business, approve you for a business credit card, or offer trade credit. Although they may look at your credit score as well—especially in the early years of your business—establishing a credit history for your company might open doors to new opportunities.
Though there is a new wave of digital accounts that have no monthly costs, most business accounts have a monthly fee, which is usually around £5. You’ll also have to pay for cash deposits and withdrawals, as well as other transactions.
Banks provide various types of accounts and services to businesses, and that variety has only grown with the increase of online financial institutions and e-commerce.
Business bank accounts are important tools for managing operating cash flow, but the types of accounts required differ depending on the business.
|Type of account||Brief overview|
|Checking Account||As it has the fewest constraints on what you may do with your money, a business checking account is probably the most flexible of all business bank account types. It allows you to withdraw funds in a variety of methods, including electronic transfers, wire transfers, cheques, and ATM and debit card transactions, making it an excellent way to hold the money you need to cover your business expenses.|
|Savings Account||Business savings accounts are a better choice than checking accounts for profits you do not intend to use in the near future. They let you earn a competitive interest return on your savings however access is limited.|
|Money Market||An MMA is a type of interest-bearing account that combine elements of business checking and savings accounts. Most have a higher interest rate and usually include check-writing and debit card capabilities for ATM withdrawals.|
|Merchant accounts||A merchant account will be required if your business accepts debit and credit card transactions. When a customer pays you, the money is automatically sent to your other business bank accounts once the payment has been completed.|
|Certificates of deposits Accounts||A CD account, as an alternative to a savings account, might earn your company even more income. The only catch is that you can’t touch your money for a certain period of time. This is typically known as the CD period and can last anything from a few months to several years. If you withdraw funds from your CD before the term is over, you will be subject to a high penalty charge.|
Many businesses checking accounts are also compatible with common business tools such as accounting software. While not essential, this might save you from manually transferring the details of all your transactions. These accounts often provide lower annual percentage yields (APYs) than other types of business bank accounts.
If your business has started to make or spend money, you should open a business checking account. If not, you should probably wait and stick to your personal bank account.
Federal law limits you to six fee-free withdrawals every month. Most accounts also restrict you from writing cheques or withdrawing cash from an ATM.
Savings accounts for businesses allow you to earn interest on your money. However, there are higher starting deposits.
Business MMAs are similar to savings accounts in that they allow you to access your money in more ways. They also require a larger minimum deposit, which may prevent some business owners from opening one. The maximum monthly penalty-free withdrawal limit is six per individual.
Insurance, greater interest rates, and additional methods to access your money are all available with MMAs. However, they have minimum deposit requirements, fees, and transaction limits.
Merchant accounts act as a link between these new payment methods and regular bank accounts. A merchant account is required if you intend to do business online or take different forms of payment.
Most card and electronic transactions will cost you money under a merchant account agreement. How much depends on your supplier and their cost structure: some charge a percentage of the overall transaction, others a flat fee, and still others a combination of the two. Some of these costs will be paid to your customer’s bank, while others may be paid to Visa and Mastercard.
Certificates of deposit Accounts
CDs are a type of business savings account. They are not an appropriate location to hold funds needed to support operating expenditures. CD laddering is a typical practice used by individuals and businesses to capitalise on greater APYs on longer CD durations. The interest rate is usually fixed for the duration of the CD.
CDs may make your business even more money in interest. You can withdraw funds from your CD at any time, but doing so before the term expires will result in a high penalty.