Why do I need a bank account?
Everything you do in business revolves around money. This money needs to be identifiable at every stage of the transaction and of course the money also needs to be identifiable from your own personal finances. Opening a business bank account is the simplest way to achieve accountability and provide a good degree of transparency in your business dealings. A business account will give you credibility as your bank has assessed and accepted your business proposal.
Is it necessary to open a Business Bank Account?
If you are a sole trader or an informal partner (not as in partner in a formal partnership) and you have a personal cheque or deposit account, it is acceptable to have customers write their cheques to you personally and then for you to bank them in your personal account.
This is not the best way to do your banking for the reasons mentioned above. Where there is little choice, it is an acceptable method in the short term.
What type of account can I open?
Open a standard cheque book account (current account). At this stage your only interest should be to pay in cheques and withdraw money. Unfortunately, you will probably have little profit to accumulate interest therefore high interest account will be of little use.
If you are a sole trader you can open an account that will have your name and trading style i.e. Lolly Jolly T/A Lolly Business Services (T/A means ‘trading as’). This gives a more professional look by having a business name, and will also allow you to ask for cheques to be written in your business name only i.e. ‘Smith Business Systems’.
If you create a limited company you could open an account in the name of say ‘Lolly Business Services Limited’. You will need to have your limited company set up before your visit to the bank.
Do I need a high rate of Interest?
Small businesses don’t make huge profits in their first few years. Instead of looking for an account with high interest, it would be more advisable to avoid bank charges. Whatever your balance, small business accounts will always attract charges for one reason or another.
Internet banks often provide the highest interest if this is really what you want.
How do I open a bank account?
Shop around. Since you opened your personal account, there will be much better offers on the market. Your current bank is not necessarily the best bank to open your account with because:
- Nanks offer a varying degree of business start up accounts: some have no charges for two years, Internet banking, an instant cash card, 24 hour availability
- keeping your business life away from your personal life will ensure that your bank is not in total control of your finances;
- A bank that does not have you using all of its products is very keen to offer you the best deals.
Make an appointment with your chosen bank they will probably want to see most of the following:
- A business plan (at least a brief one);
- Where your start up finance is coming from (if applicable);
- Information about signatories and who, if any, are your partners a general run through of the business;
- If you are a limited company the bank may well want to see the ‘Certificate of Incorporation’ (issued to you when you form a limited company).
Bank statements
Monthly statements, despite being for free perhaps in the initial signing up period, are not good enough for a small business. You must be able to see where you are spending money on a weekly account. If there is something wrong: a cheque bounced (returned unpaid), or a cheque stopped by the drawer, a slight overdrawn situation you need to know quickly or risk high penalty fees. No bank allows free periods for penalty payments and only experienced bookkeepers can survive with monthly statements - be warned!
I have a bad credit record
Business bank accounts are not as difficult to open as personal accounts because the bank makes money from them! If you have a viable business plan, acceptance should be a formality. Paying in an initial deposit can only help.
Banking cheques in different names
If you had a bank account in the name of ‘Lolly Jolly T/A Jolly Business Services’ a cheque written out in the name of ‘Jolly Business Services’ or ‘Lolly Jolly’ should be OK.
However, if you have a cheque written out to ‘Lolly Jolly’ and you are a limited company the cheque might be refused.
In circumstances where the cheque is written out to another name, for whatever reason, your bank manager can authorise the acceptance of such if you seek authorisation before accepting it.
Small Business Internet Banking
Internet banking is an excellent resource to manage business finance - particularly if you are a small business owner.
Visiting your bank is time consuming. Paying in a cheque could take 20 minutes in queuing time alone.
Internet banking is cheaper and more accessible.
On-line banks
If you are PC literate and you feel confident enough to use and understand on-line banking it is a good choice. First find out about:
- Set up fees;
- Minimum monthly fees;
- Charges for paying in cheques and withdrawals: these costs ‘should’ be less Than a ‘standard’ bank account as the transactions cost less electronically Than manual procedures;
- Support available, and what is the cost, if any;
- Banks response time to e-mails: leave out this question at your peril;
- On-line banking twenty four hours a day, seven days a week.
Why some businesses do not use Internet banking?
Some people lack the basic web skills or they simply do not have access to the Internet.
Some people with 56k modems may be put off by the 'slow' speeds at which their Internet performs.
Internet security is often a sensitive issue. Banks have integrated a high level of security into Internet banking ranging from 128bit encryption to unique user IDs and passwords. While security should be an concern, it should not stop you from online banking.
Benefits of Internet banking in small businesses
The main benefit to small business owners is the amount of time (thus money) it saves. Although Internet banking is restricted to managing accounts and making on-line transactions, it cuts out much of the need to visit the bank.
Using Internet banking will also increase the efficiency of paying money (bills, debts, wages, etc) as it can reduce the need for writing and sending cheques (which can take up to 5 days to clear). BACS payments can be created via Internet banking to pay such money, which is also an efficient way of paying staff wages.