A 2017 study by TD Bank found that more than 27% of business owners use the same bank account for personal and business purposes. Oftentimes, founders who bootstrap their companies start by pulling from their own funds. However, as time goes on it becomes more and more critical to separate personal and business finances—to protect both.
We want to help small business owners understand the benefits and options they have available to them when it comes to business-specific finances. If just over a quarter of small businesses are sharing personal and business finances, we’d like to arm them with the knowledge they need to open a business bank account, and to help the other 73% ensure that they’re using the right business bank account for their needs.
What is a business bank account?
A business bank account is one opened for and dedicated solely to business finances. Business bank accounts can consist of a business savings account and/or a business checking account.
Business bank accounts are more than just a separate bank account that you only use for your business—they involve particular perks and requirements designed specifically for business. Business bank accounts might offer more preferable fees and interest rates, but create requirements for acceptable use.
Opening a business bank account can be as simple as getting a new debit card or opening a new line of credit at your current financial institution. What’s important is that personal funds are separated from company funds.
What’s the difference between business and personal bank accounts?
A business bank account will never have personal expenses withdrawn or deposited. Personal bank accounts, which often include a checking account and savings account, are used at an individuals’ discretion.
In the early stages of a business, founders may utilize their personal bank accounts to fund purchases or write checks for the company. But since the bank account is in the name of a single individual it would still be considered a personal bank account.
Benefits to opening a business bank account
If you’re one of the 27% of business owners using a personal account for your business, it may seem to be working well for you. Why fix what’s not broken? Well, it turns out there are a lot of reasons.
The benefits to business bank accounts will vary based on your unique conditions and the account you choose, but generally you can expect most of the following:
- Secure personal information for client transactions
- Increased professionalism & trust
- Easier expense tracking
- Allowing banking access to employees safely
- Ability to access a line of credit or apply for a loan if need arises
- Strengthening credit history
- Ability to take full advantage of tax deductions
- Business-specific incentives like easier ACH payroll payments or higher interest yields
When to open a business bank account
“Open a business account when you’re ready to start accepting or spending money as your business. A business bank account helps you stay legally compliant and protected.” - Small Business Administration
It’s recommended that you open a business bank account as soon as you get your Employee Identification Number (EID or federal tax ID). As soon as you open your business bank account, begin routing all of your business expenses through the dedicated account.
How to choose the right business bank account
A business bank account will generally work for any business owner, but with a few questions you may be able to narrow down the exact type of business bank account that will take your company to the next level. We’ll cover a range of options and topics that can help you uncover your business banking priorities.
Types of business bank accounts
- Business checking account: Business checking accounts are your all-purpose accounts that can be used to write checks, complete payroll, process ACH funds, depositing checks or cash, and purchasing with a business debit card.
- Business savings account: Business savings accounts allow you to build an emergency fund and create wealth with more lucrative interest-building.
- Cash management account: A cash management account (CMA) is an option that allows you the flexibility of saving, spending, and investing all in one. These accounts are web-based and feature a one-stop-shop for your business banking needs.
Things to consider
- Fees: A monthly maintenance fee is usually low to help small businesses, but may be waived if you already bank with the institution or you meet a monthly balance or transaction target. You may incur a monthly fee for going over a transaction limit, for early termination, ATM usage, or failing to maintain a minimum balance. Fees can be negotiated, and in some cases minimal fees for a better account with more generous interest can be worth it.
- Credit & debit cards: Consider your bank account usage and if you’ll need a linked business credit card or debit card to use for your business. If you do need cards, look for business bank accounts that offer the card features you need (such as a smart card, virtual cards, or employee credit cards).
- Checks or ACH: Are you old school with paper checks? You might want to find a business bank account that offers free checks, or can cut checks for you. Many businesses rely on ACH transfers for payments and payroll, so talk to your finance team or professionals you trust about exactly what your transfer needs will be.
- Introductory offers: Short-term incentives are often used to attract business owners to open bank accounts, and you should take advantage of them if you can. You might see banks offering a cash bonus if you open a new account or deposit a certain amount of money. Other rewards might include a suspension of fees for the first 6 months or year, or more aggressive interest to help you earn faster.
- Mobile banking: There are many options for mobile and online banking that allow your business to manage finances on-the-go. With less overhead, an online bank can allow for more competitive pricing. You can face drawbacks with the lack of brick-and-mortar options, such as difficulty depositing cash. A strong mobile application or integrated expense management software might be a priority for your modern business.
- Merchant services: If your business plans to take credit cards for customer payments, you need to figure out how you can offer merchant services. Third-party processors are common, but some business owners find better terms through their bank which can also offer merchant services. Shop around to see if a third-party or business bank offers better merchant service agreements.
- FDIC: The Federal Deposit Insurance Corporation protects financial institutions and the deposits made there. This includes checking and savings accounts. Be sure that your institution is FDIC-insured and compliant.
- Access to funding: Many banks offer business checking accounts that come with options for a business line of credit or business loans. If you think you may need increased capital for your business in the near future it may be worth finding a business bank account that comes with these extras.
How to open a business bank account
Opening a business bank account is actually very simple as long as you have done the prep work. Essentially all you have to do is assemble each of the documents listed below, and then visit the institution you’ve chosen to bank with, whether online or in person. You may have to jump through a few additional hoops depending on the particulars of the institution, but you’ll likely have an open account in an hour or two.
Requirements to open a business bank account
To open a business bank account you’ll need the following:
- Your legal business name
- Employee identification number (EIN)
- Business address
- Business phone number, email address, website, etc.
- Drivers License (for ID number and photo)
- Second photo identification, such as a passport
- Business license, partnership documents, or articles of corporation or organization depending on your business structure
- Account information for other accounts at the same or other financial institutions
- Names of individuals being issued cards, if necessary
A note on social security numbers: it is not required to have a social security number to open a business bank account. However, an identification number is required. Many business owners use a SSN, but you can also use a EIN, drivers license number, or taxpayer identification number. Credit unions are more flexible with these requirements than traditional banks.
Depending on the type of business bank account and issuing institution you may need additional information or to meet additional requirements per their specifications.
Should you open a business bank account at a traditional bank or a credit union?
The main difference between a bank and a credit union is that banks are for-profit. Credit unions are non-profit. Banks and credit unions often offer the same products and features, though credit unions may be able to provide more favorable pricing and fees, as well as the local and personal concern you often miss in a corporate bank. Many business owners crave the accessibility and speed of technology, so a modern tech-savvy institution might be the right bank.
You may be able to get the best of both worlds with a community bank or smaller bank that can still provide the personal touch you need in a financial institution. There are pros and cons to each choice, so consider the following to determine if a traditional bank or a credit union might be right for you.
Traditional bank
Pros
- Better mobile applications
- Extra tools like bill pay, ACH batching, etc.
- More options for nationwide financing
Cons
- Higher interest rate for borrowing
- Higher transaction fees
- More eligibility requirements
Credit union
Pros
- Lower interest on loans
- Higher interest on savings accounts
- Resources for financial education
- Human touch, better customer service
Cons
- Fewer options and fewer branches
- Fewer technological tools and advances
- May not offer business-specific incentives
Online banking solutions
Nowadays, you may not even have to leave the comfort of your couch to open a business bank account. For a fast moving business you may prioritize the speed and accessibility offered by an online bank. In fact, during the COVID-19 crisis many businesses didn’t have the option of physical bank locations.
As reported by Forbes, the best online banks of 2020 are
- Ally
- American Express National Bank
- Barclays US Savings
- Capital One
- Charles Schwab
- Chime
- CIT Bank
- Discover Bank
- Marcus by Goldman Sachs
- Radius Bank
- Synchrony
The best online bank is the one that fits your unique needs, so consider a software-based bank that foregoes the fees of traditional business accounts and lets you control employee spend with expense management software. Solutions like BILL can offer you a line of credit for your business and cards for all of your employees—for free.
Banking for your business
Choosing one bank account over another isn’t likely to change the entire trajectory of your business, but it can help you get a leg up. Carefully research and weigh your options to find a business bank account that brings you the best options for growth. And don’t forget—open a business bank account to protect your personal finances right away.
Your business finances need to be smart and strategic if you are to thrive. BILL creates innovative solutions for every part of your business platform. Interested? See more with a free BILL demo.
