Ready to spend money on your business or accept money from your customers? If so, you’ll need to take on two small business banking actions: look into setting up a business bank account and opening a credit card account.
You’re likely well versed in what bank accounts are and what they do. But when it comes to small business banking, there are some differences to keep in mind. In this article, we’ll describe those differences and explain what to look for in a bank for your small business.
Why can’t I use my personal bank account for business purposes?
There are lots of great reasons to keep your business and personal money separate. By opening a business account, you can see, at a glance, where your business stands financially. This is important not only for monitoring your expenses and watching for shortfalls in your cash flow but also for creating quick-and-easy snapshots of your financial status for investors, lenders, accountants, and others who may need it to support your business.
When personal and business money is intermingled, you may run into issues you wouldn’t by having separate accounts. Here’s what that might look like:
- You may have to use your personal savings accounts to cover shortages in your business’s cash flow.
- You could have trouble getting business loans or lines of credit for your business. This is often the case when lenders can’t determine. which expenses and influxes belong to an owner or their business.
- Audits could be tougher to navigate, especially when you need to prove the validity of the write-offs and business expenses you claim.
- You may have higher fees from accountants who will need to spend extra time untangling your intermingled accounts.
- It could take longer to process your personal checks through your account.
- You might struggle to connect merchant accounts that can process credit card and debit payments on your behalf.
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Of course, there are other advantages to opening a small business bank account, too. Here are a few:
- Your customers can make checks out to your business rather than to you personally.
- You can authorize your employees to handle certain banking tasks without adding them to your personal accounts.
- You can open lines of credit or business credit cards that can help you establish a credit history for your business.
- And, you can link your bank account directly to your accounting software without having to remove personal deposits and expenditures.
What kind of business account will I need?
Most financial institutions offer several types of business accounts for small business owners:
Free small business bank accounts
These accounts allow owners to make deposits and withdrawals, write checks, and make electronic transfers with no minimum balance requirements or monthly maintenance fees. Some fee-free accounts also offer an annual percentage yield (APY) that lets owners to earn interest on the money they hold in their accounts.
Business checking accounts
Many owners use business checking accounts to manage their payroll, taxes, and expenditures. With these accounts, you can write checks, use a debit card, and set up electronic transactions.
Most banks charge a monthly fee for these accounts, but many have introductory offers, sign-up bonuses, or balance rules that waive it. Of course, there could be other fees. You could see charges for excessive transactions, sizable cash deposits, the use of out-of-network ATMs, wire transfers, and account overdrafts.
Savings accounts
With a savings account, you can set aside portions of your revenue and earn a small amount of interest each month. Many owners choose traditional business savings accounts, but owners who hold large amounts of cash for long periods of time sometimes opt for high-yield savings accounts, money market accounts, or business certificate of deposit (CD) accounts.
Of course, the rates and terms of these accounts vary by financial institution. The fees can vary, too. You may be charged a monthly maintenance fee (often waived by meeting a minimum balance requirement) and fees for excessive balance transfers, sizeable cash deposits, or wire transfers.
Merchant service accounts
Merchant service accounts allow owners to collect and process credit card and check payments, though they’re becoming less popular with new payment processing services, online payment systems, and point-of-sale systems. These accounts are subject to a bevy of fees, including account maintenance fees, transaction fees, fraud-prevention fees, and fees to settle daily credit card transactions.
Credit card accounts
Most banks also offer business credit card accounts that can simplify your purchasing process and help you establish business credit.
Like traditional credit cards, these cards are subject to fees and interest payments for outstanding balances. However, bank-issued cards aren’t always the best credit card option. You can learn more about business credit cards in this guide:
Most owners start with a business checking account and add other options as they grow and scale their businesses. You might choose this approach, too, or you could open separate accounts to manage your income, taxes, payroll, and recurring expenditures. Your accountant should be able to advise you on the right approach for your business.
Would you like to connect with an accountant? Check out some of our favorite firms here:
Reconciled
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Xendoo
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With Xendoo, you can access a dedicated team of expert CPAs and accountants who provide monthly bookkeeping, tax preparation and filing, and tax consulting, three services that will help you stay on top of all your financial needs. Their team can also help you with your personal tax returns, too. You can explore their plans with totally transparent pricing by following the link below, and for a limited time, you can try their online bookkeeping service free for one month. Restrictions may apply. See Xendoo’s site for details.
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What should I look for in a bank for my small business?
There are lots of factors to keep in mind. These include:
Fees
Compare the accounts you could set up at multiple banks. Pay close attention to the fees you’ll be charged for transactions, low balances, and transfers and whether you’ll be able to navigate them.
| Want to avoid these fees? Look into online business bank accounts for small businesses. These accounts are often “fee free,” but they can present their own set of challenges (namely, it’s impossible to make cash deposits).
Still, many are highly recommended, including Novo. This fintech provides free business checking accounts to more than 150,000 small businesses. |
Interest rate
Study the current interest rates of various banks and credit unions. Rates will vary over time, but you may find consistently better rates through some (like internet banks and credit unions) than through other institutions.
Options for lines of credit, business loans, and credit cards
Even if you don’t plan to use these options right away, it’s good to know whether the banks you’re considering offer these products and the rates they charge.
Introductory offers
Many banks offer incentives to business owners for opening new accounts. Though these offers are a one-time benefit, you should compare what’s available and decide if any offer is strong enough to sway your decision.
| Keep in mind that introductory cash bonuses are taxable. You’ll need to report any monetary amounts your bank offers on your tax forms that year. |
Convenience
Most owners open business bank accounts at the institution that houses their personal accounts. Often, it’s because they know the bank and can access it easily. Still, you may consider other local institutions that are just as convenient, and possibly, have better benefits (such as a more accessible ATM network or a better online or mobile experience). You could also look into an online bank your small business can access from anywhere in the world.
Experience
At some point, most business owners have complicated questions or problems with their accounts that will require the bank’s assistance. In those moments, customer service is critical. Try meeting with the people who would support your account or call the customer service line to find out what it would be like to navigate your issues with them. Wait times and friendliness are two factors you might weigh in.
Integration
Look into whether the bank you’re considering can feed data into bookkeeping software you’re using for your small business. Some smaller banks don’t have this capability, but those that do make money management a much simpler task.
How do I open a small business bank account?
Most banks encourage business owners to open their accounts in person, but some offer online applications. Both options require owners to follow a similar process. This includes providing key information about the business and owner and submitting documentation.
The documents you’ll need to provide will vary based on both the institution and the corporate structure of your business. The following list provides common requirements for each structure:
Sole proprietorship | Social security number Two forms of identification A Fictitious Business Name (or Doing Business As name) certificate for businesses that operate under a different name than the owner’s |
Partnership | Employer identification number (EIN) Articles of organization Business partnership agreement Signature cards for partners authorized to use the account |
S Corporation | Employer identification number (EIN) Articles of incorporation Corporate charter Signed corporate resolution Signature cards for officers authorized to use the account |
C Corporation | Employer identification number (EIN) Articles of incorporation Corporate charter Signed corporate resolution Signature cards for officers authorized to use the account |
Limited Liability Company (LLC) | Employer identification number (EIN) Articles of organization Signature cards for partners authorized to use the account |
What’s next?
The next task on your list should be opening a business credit card. Our Small Business Basics article, Attaining a Business Credit Card, will walk you through the important considerations you should keep in mind before applying.
Be sure to log into your owner’s portal for more free, personalized guidance that will help you make your venture a success.
