How to get the right bank account for your business

By Catherine Pope

February 20, 2020

For most of us, banks are a necessary evil. But getting the right account can actually make your life much easier. There’s lots of choice available, especially with the rise of fancy new challenger banks. In this post, I’ll explain why you need a business bank account, how you can find one, and what you can do to make it work harder for you.

Do I need a separate business bank account?

If you’re the director of your own limited company, you are legally required to open a business bank account. Not just a separate account, but one designed specifically for businesses and it must be in the name of your business. This is because none of this money belongs to you until you officially pay yourself in the form of salary, dividends, or a director’s loan. Every transaction should be recorded in your bookkeeping system and matched with your bank statement.

Sole traders aren’t subject to the same restrictions and your money doesn’t have to be held separately. If you have a small turnover and a low number of transactions, an ordinary bank account could be fine (although check your bank’s terms and conditions). Nevertheless, it’s still a good idea to have a separate bank account. Here’s why:

  • Separate accounts make it much easier for you to manage both your business and personal finances, especially when you’re doing your tax return
  • You’ll get a clearer sense of the financial health of your business – so you’re less likely to be unwittingly subsidising it
  • If there’s a tax investigation and your account is frozen, you won’t lose access to your personal money

I bet that last one got your attention. Tax investigations are rare, but statistically we can expect at least one during our careers.

How to find the right business bank account

Before considering a bank account, have a ponder about what services you require. Here are some questions to ask yourself.

Do you need to:

  • Pay in cheques?
  • Deposit cash?
  • Receive money from overseas?
  • Receive money in different currencies?
  • Have access to an overdraft?

And what’s important to you?

  • A physical bank you can visit?
  • Phone support?
  • Integration with accounting software, such as Xero, Freeagent, or Quickbooks?
  • A mobile app?

Some of the banks offering free services provide only email or online chat-based support. They also charge extra if you exceed a certain number of transactions each month. Make sure you understand the costs and the limitations of the service provided. Essentially, there’s no such thing as free banking – they’ll either charge you a monthly fee, or you’ll pay as you go. Work out which is the best deal for you.

You should also consider a few other factors:

  • How long has the bank been established? Not all banks are too big to fail, and some of the smaller ones are vulnerable in the current economic climate.
  • If you’re an ethical investor, what are their policies on the environment? Where will they invest your money?
  • Are they covered by the Financial Conduct Authority (FCA)? This ensures you’re protected (up to £85,000) if the bank goes bust.

As an impartial financial coach, I can’t recommend specific banks. It’s worth asking your friends and associates to find out what they love and hate about their own bank. Online reviews can be helpful. Based on the reviews for one major business bank, Deidre at the Colwyn Bay branch is either the antichrist or humankind’s saviour. Of course, customers are much more likely to post a review when they’ve been thwarted, rather than because they’re moderately happy with the service.

To compare accounts, take a look at Moneyfacts and Moneysupermarket. And Trustpilot is a rich (and sometimes colourful) repository of opinion.

You’ll need to provide various pieces of documentation when applying for an account. The UK Finance website offers a handy tool to show you exactly what you’ll need, depending on your business type.

Making your bank account work harder for you

Although the 21st century is fraught with complexity, it also offers us a lot of functionality. Here are three ideas on how you could do more with your bank account.

  • If you’re using accounting software such as Xero, Freeagent, or Quickbooks, you are often able to add a feed from your bank account. This means you can see all your financial data in one place and don’t need to keep logging into your bank account to see whether a client has paid you. It’s then a breeze to match payments with invoices. Sometimes there’s a charge for this service, around £4 per month. This could be a good investment, though, if it saves you a lot of tedious admin. Alternatively, a third-party service available through Yodlee is usually free. It’s not updated as frequently, though.
  • Most banks offer alerts via SMS or email. While some levy an additional charge, it might stop you unexpectedly plunging into a much more expensive overdraft.
  • A few banks let you create multiple accounts under the same name. At the very least, they’ll give you the option of a separate savings account. This means you can put aside money for tax, VAT, or a new laptop – this is vital for maintaining good cash flow. Keeping these funds out of sight ensures you don’t accidentally spend them.

In summary:

  • A business bank account is essential if you’re a limited company
  • It’s optional but advisable if you’re a sole trader
  • The right business bank account can save you time

So, do your research to make sure that account is working for, rather than against, your business.

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