Business accounts help business leaders successfully manage their corporate finances.
What is a business bank account?
Business bank accounts are very similar to traditional current accounts and most people with experience of managing their own finances, will find themselves in very familiar territory with business banking.
As with traditional consumer current accounts, business bank accounts provide a secure environment to store a business’s money, so it is not susceptible to theft or damage. Beyond this basic functionality business bank accounts also enable businesses to undertake transactions, like paying-in or withdrawing money.
How does business banking differ from personal banking?
Although the functionality of business accounts is similar to personal banking, there is no history of ‘free banking’ in the business banking sector. In some respects this is better for well managed businesses, who do not have to help collectively absorb the costs of ‘free banking’ through reduced interest on balances or punitive charges. However, to those unfamiliar with the idea of paying directly to undertake transactions, the idea of charged banking can feel uncomfortable.
Why do people/businesses use business accounts?
There are a few reasons, both practical and legal, why businesses choose to use business bank accounts.
Public Limited Companies require a minimum of £50,000 share capital before they can be formed (25% of which must be paid up) and therefore the funds need a business bank account in which the capital be placed.
There is no legal requirement for Private Limited Companies to have a bank account, but if company monies are kept with individual directors then this would be considered a loan, and therefore there would be a requirement for interest to be attracted by the individual holding the funds.
Many sole traders may find that low levels of business activity through their personal account go unnoticed, but most personal bank accounts’ terms and conditions preclude their use for business activity. Therefore if an individual tries to run a business through their current account, they will probably be asked to cease by their bank. If they refuse, the bank would most probably close the account unilaterally. Equally, a sole trader may find that personal expenses (an unexpected Direct Debit or other charge) impact their ability to run their business smoothly by draining funds required for business activity.
Furthermore, for both personal and corporate tax returns and company audits, separate bank accounts make the process of good bookkeeping far simpler. The hourly cost of an accountant to unpick personal expenses from business expenses in a standard current account is likely to be considerably more than the charges a business might accrue for the use of a dedicated business account. What should businesses look for in their bank account?
The exact requirements a business could have will vary from business to business, and the type of business you run will be the key to determining what sort of account you need. For example, a retail business that needs to ‘cash up’ every night and take the day’s takings to the night safe will need a bank with a local branch presence, whereas an online business that receives electronic payments may be able to dispense with a branch presence in favour of better online security and functionality.
What benefits do you get from a business account?
The degree to which business bank accounts offer enhanced functionality, and the specifics of that functionality, vary from bank to bank and account to account.
Some business accounts will offer an overdraft facility to help ensure businesses don’t have to feel the financial burden of a failed payment or bounced cheque quite so heavily due to cashflow issues. However, there is usually a charge for this facility, so comparing the rates for this is very important. You should also be careful not to exceed the overdraft limit, as this may result in substantial charges and should be avoided unless it is absolutely vital.
There are currently various banks that offer business banking free of charge for a set period of time, allowing you to focus on your current overheads without adding another annual charge to that amount. However, this offer may only be exclusively for a particular type of business and may still feature other charges as part of the deal, such as transaction charges. By making use of our comparison table, you can review the best business account deals and decide which offers the greatest benefit for your needs.
Some banks will offer the added incentive of a service dedicated to aiding small businesses in their growth and development through an in-branch support team, which is best if you prefer a face-to-face interaction when dealing with business issues. Others may provide services that are similar but will communicate primarily via a telephone support helpline.
Although they are integral businesses expenses, many businesses fail to look at the savings that can be made from switching their business bank account when they analyse other opportunities for efficiency. Indeed, business bank switching in the UK has been low, even in comparison to the woeful levels of personal account switching.
To help foster increased competition and increased switching, businesses were included when the seven day switch launched in the UK on 24th September 2013.
How can businesses minimise their banking costs?
Careful analysis of past activity (where it can be reliably used as a guide for future activity) can help steer businesses to accounts that charge the least for the services they regularly require.
Business startups often find that they can get access to a period of free business banking. Where this is the case, this period can help by acting as a useful guide for the activity they are likely to undertake and the costs that might be associated with different accounts.
For micro-businesses or sole traders who are unlikely to hold large balances, a number of prepaid business accounts are available. Some charge a monthly fee, but others are available for a set annual cost. Although factors such as no branch network and reduced functionality (when compared to traditional business banks) are apparent with these accounts, they can be a great option for those wanting to fix their banking costs whilst retaining the ability to arrange direct debits, manage their money online and receive electronic payments.