Here Are The Facts About Business Bank Accounts You Should Know

Whether you are starting out as a sole trader or setting up a limited company, one thing you cannot overlook is a bank account specifically for your business activity.

Many people who are new to business make the mistake of just putting their business transactions through their personal current account rather than through a business bank account.

The thinking is that because there are not many transactions, it isn’t worth the hassle of setting up a new bank account. However, having a separate bank account will make your life so much easier when it comes to working out your tax liability and managing your cashflow.

Business bank accounts vs personal bank accounts 

Both business and personal bank accounts are there to help you manage your money. However, business accounts are set up with extra features exclusively for businesses, which aren’t available for personal bank accounts. 

Business bank accounts	Personal bank accounts
Designed exclusively for business use	Designed for personal spending
Can be set up with business-speficic features like invoicing, payroll and expense tracking	Only has personal services, such as overdrafts and saving accounts.
Can be integrated with accounting software to automatically track your profits and expenses	Hard to differentiate between your personal and business finances at a glance
Higher transaction limits	Lower transaction limits
Access to business loans and credit cards	Access to personal loans and credit cards

Some personal bank accounts have specific terms and conditions that state they are not allowed to be used for business use. In that case, you will need to use a business over a personal bank account. 

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The benefits of bank accounts for businesses

Business accounts come with a lot of benefits, which vary depending on the exact bank and account that you open. However, the top 3 benefits for any business are: 

1. You get a better view of your finances 

Having a dedicated business account puts all of your financial information into one place. This makes it easier to track your ingoings and outgoings, without having to separate your business transactions from your personal transactions. 

As a result, decisions about your finances become simpler, and can be easier to integrate into accounting software – which will then automatically pull all your transactions into its system. 

2. It’s more professional 

Having a bank account made for businesses makes your company look more legitimate, making it easier for your clients and customers to trust you. 

If you invoice a client, and they have to make the payment out to your name, not your business name, there will always be a little doubt in the back of their mind about whether they should trust the payment. 

3. You get better access to financing and business services 

If you’re looking to take out business loans or apply for credit cards for business use, having a business account will be a prerequisite for these applications.

In addition, if you plan on having a business that needs to accept card payments (like a physical store), you may need to have a bank account to set this up. 

The downsides of business accounts 

There are pros and cons to everything in life. For bank accounts for businesses, the downsides are: 

1. You need to factor in additional costs

It is free to open a business account. However, most do come with some form of monthly or annual fee. In many cases, monthly or annual fees are waived for a set amount of time after you open the account.

This is primarily to help attract you as a customer, but it is also to help improve your cashflow as a new business.

You may still need to pay fees for certain services, such as cashing cheques or making payments. 

After any initial ‘free’ period is up, you can expect to pay between £5-£20 a month depending on the size of your business. There may also be additional fees for some services, too.

Keep in mind that any banking fees you pay will be deductible from your profits as a business, helping to reduce your tax liability. However, you should certainly be prepared to pay much more in banking fees than you’re likely to be used to on your personal current accounts!

2. Business bank accounts have stricter requirements 

It’s harder to open a business account than a personal one. As well as providing your personal details, you will also have to provide details and proof of your business. This is done to make sure that your business is real and legitimate and comply with anti-money laundering regulations. 

3. Your rates might be worse 

Business accounts might have a lower interest rate than personal bank accounts. For startups that don’t require a business account yet – it might be worth holding off on opening one while you take advantage of better interest rates. 

Requirement for limited companies

If you have a limited company, then a business account is an absolute necessity since that is the only way you can open a bank account in the name of your company.

In fact, it is a legal requirement that a limited company has a bank account specifically for businesses, so your options really are limited.

The fees do vary, but on the whole, most of the high street banks offer a similar level of service for a similar fee. It’s simply a case of choosing which one you are most comfortable with.

However, as a sole trader, you technically only really need to open a separate personal bank account. However, most personal accounts come with the caveat that they are “not for business use”.

This is because they do not offer the same level of features and, unlike business accounts, they are often offered free of charge.

So, this means that even sole traders tend to need to open a business account.

Start-up friendly bank accounts 

Historically, Barclays was considered very ‘startup-friendly’ and they prided themselves on doing a lot for small businesses.

However, most of the UK high-street banks now offer very good services for businesses. Some even include accounting software as part of your account fees, helping save you money.

For example, NatWest actually acquired FreeAgent in 2018 and include a free subscription to the software with all new business current accounts.

There are also modern online banks such as Tide. If you don’t need the ability to walk into a branch, they are certainly worth considering.

How to compare business accounts

Finding the best business current account for your needs can be a little tricky.

Most come with fairly standard features such as debit cards, online banking, apps, etc. Where they differ is usually in the pricing and the added extras they provide.

It’s best to start by working out exactly which services you are most likely to need. Do you do all your transactions online? You’ll want to look for accounts that have the lowest fees for electronic transactions.

If you cash a lot of cheques, you might want to compare the different fees for depositing paper cheques.

Don’t forget to factor the monthly fees in too and any savings you’ll make from included accounting software, etc.

Finally, don’t forget to factor in the size and expected turnover of your business and how that may impact the fees you pay, especially as you grow. 

While it’s possible to switch business accounts at any time, the process can be quite time-consuming and so it’s better to spend a little extra time now to ensure you make the right decision.

Are business banking apps safe to use?

While the security of your bank account is always extremely important, the nature of a business and the amount of money you’re likely to have going through it makes it even more important on business accounts.

The good news is that banking security in the online world has really improved over the last few years. 

From fingerprint recognition to card readers and even facial recognition, banking apps are now among the most secure apps you can download.

Of course, nothing is completely immune from being hacked, but technology means you can breathe much more easily and enjoy the extra convenience a banking app offers without too many concerns.

Opening up your business account

Applying for a bank account for businesses is not too different to applying for a personal bank account.

You will need all the same personal details for each director of business as you would need for a personal account, and in addition, you will need details of your business.

Recommended Application Method:

If you find the idea of completing application forms a little daunting, then you will be pleased to hear there is a quicker and much easier way to apply. Many of the company formation agents such as 1st Formations offer ‘Fast Track’ business bank account applications.

If you are forming your company through them, you have the chance to add it during the formation process, and they complete 90% of the information for you.

The advantage of doing it this way is that not only is the application process much simpler and easy-to-follow (partly because most of the details needed will be automatically imported from Companies House for you), but applications done in this way also are given priority – hence the ‘FastTrack’ aspect.

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Once you have set up your business account, the next step will be to establish some basic bookkeeping procedures so that you can record transactions accurately and save yourself time when it comes to annual accounting and tax returns.

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