Having a separate business bank account to keep your business finances separate from your personal financial setup is a sensible strategy, even if you’re a sole trader.
While starting a new business venture without a dedicated bank account for your business funds may sound tempting, it isn’t always the smartest choice as it’s really important for many reasons to keep your personal, day-to-day funds and your business finances separate.
Part-time business owners, as well as new start-ups, often have a tendency to incorporate their personal money with their business finances. And for sole traders we have an article on sole trader’s business banking you might find useful.
While this may be the easiest and most convenient way to operate, it has disadvantages that can impact you later as you start to report income tax, corporation tax and VAT.
Regardless of the size, prospective business owners need to handle their business as a business – which means setting up a business bank account. While you may incur additional expenses and bank fees, you are setting up the foundations of your business which means less bother in the future.
What is a business bank account?
Generally, most banks provide the option to open a separate bank account dedicated to your business.
Here, you’ll have access to business-related financial products – including overdrafts, loans, and credit cards – to help you manage your business.
Whether this involves investing in expansion plans or everything in between.
In addition to keeping track of your business expenditures, a business bank account may also include services such as:
- Automated expense categorisation
- Budgeting tools
- Ability to generate invoices
- Integration with accounting software
- Account management
Why you need a business bank account
We would always suggest having different bank accounts for your business finances and your personal finances and here’s why:
The concept of a hobby business
Demonstrating to the government that you’re running a legitimate business is hard to prove when your finances aren’t matching up.
Only legitimate businesses can deduct business expenses; therefore, running your business from a personal account may be presented as more of a hobby (for instance, not-for-profit), which you may have to prove otherwise.
Reporting and tax returns
Preparing and reporting on your annual taxes is always time-consuming and can be stressful; it’s made more difficult if you’re navigating through personal financial statements and looking for business-related expenses. Personal and business transactions should remain separate, and by keeping them in separate accounts they’re less complex to manage.
Regardless if you’re doing your taxes yourself or hiring an accountant, having your financial records in a well-kept, organised manner will allow you to make the process more efficient and ensure you don’t miss any opportunities to make the most of your allowances on your business and personal tax returns.
If you’re operating under a separate business account, this not only reflects well on your business but also presents a good image for any potential clients and new businesses, too.
As previously mentioned, treating your business as a business will ensure that it has the right structures to flourish.
Choosing a business bank account
Is there an overdraft facility?
A business account that provides an overdraft facility can come in handy, especially considering cash flow is the main reason many businesses go under.
Although, these aren’t always available – especially with digital-only banking options.
Does it offer free banking?
From online-only to high street banking, you should look into the range of options available from different business bank accounts to choose the best one for your business.
Typically, there is a charge-free period for new businesses (for instance, the first 12 or 18 months), which can possibly be followed by discounted fees for a fixed period or standard charges.
If you’re looking to switch business bank accounts, you may be offered less generous introductory deals.
What’s the service level and is there mobile banking?
The user experience varies widely depending on the business bank account you choose.
According to a recent survey conducted by the Competition and Markets Authority, Barclay’s came out as having the best mobile banking and online services recommended by SMEs for small businesses.
Will you have a business relationship manager?
Having a person you can talk to who knows your business is beneficial.
They can offer helpful advice and make decisions about important matters related to your business – much better than automated messages and anonymous call centres.
Is there practical advice on offer?
For instance, Yorkshire Bank provides ‘how-to’ guides that offer videos, calculators, tools, and online training modules.
The calculators and tools include a SWOT (strengths, weaknesses, opportunities, and threats) analysis template, start-up costs calculators, and a break-even calculator.
Is the bank online-only or are there branches?
Some digital banks don’t provide any in-person branches, this can be frustrating if you have cheques or cash to pay in.
A bank that takes the opposite view is Metro Bank which encourages walk-ins with grand foyers and exceptional customer service.
Are there limits on transactions?
It’s best to go with a business bank account that allows you to make unlimited transitions, as well as in-person and online withdrawals and credits.
How long does it take to open an account?
To open a business account can usually range between one to four weeks since checks are needed to confirm your business, identity, and any directors that are registered with your business.
If you’re looking to make your business successful, no matter the size, then you should consider opening a business bank account.
Not only do they make the tax return process much easier but they present your business with a professional image that is respected.
Hopefully, this guide has informed you on whether or not you need a business bank account.