One of your first tasks after setting up a business should be to open up a business bank account. This is not a legal requirement, despite what you may have read, but it is an absolute no-brainer. So much so that it should be a legal requirement. In this blog, we look at the reasons why you need a business bank account. But first…
What is a business bank account?
At its core, a business account is just like your personal current account. It allows people and other businesses to pay you and you to pay them.
Now, as the challenger banks’ influence has grown, you can also expect to get flashy features chucked in too – such as invoice raising software, accounting integrations, payroll assistance, and more. All designed to help make running your business that much simpler.
Reasons why you need a business bank account
Yes. You’re making a huge mistake if you don’t open up an account dedicated to your small business, regardless of whether you’re operating as a limited company or as a sole trader.
Here are 7 reasons why you need a business bank account:
1. A business account will help make a professional impression
Picture the scene. You’ve clinched a big contract. This could be the one that makes the difference, and takes you to the next level.
The delivery date has been agreed and now you’re just taking care of the admin – such as how and when payment will be made. You’ve agreed on an amount upfront. You’re just waiting on the payment and then work will start immediately.
But the payment doesn’t arrive.
After some umming and ahhing (you don’t want to be pushy) you call the prospective client and they’re embarrassed. It becomes apparent that everything was fine until you shared your bank details:
Account number: xxxxxxxx
Sort code: xx-xx-xx
Now the client has cold feet. Why don’t you have a business bank account? Did you fail the company credit check? Is your business even legitimate?
This may seem overly dramatic, but in business, impressions matter. Why should someone take a risk when, in all likelihood, there’s a competitor who can deliver a similar service around the corner?
Open a business bank account to give your business the best chance, by making it as credible and professional as possible.
2. It will save you from some very painful admin
Ah yes, one bank account to take care of everything – personal and business. One bank account means one card. One bank statement. One password to remember. That’s bound to save you loads of time when it comes to financial admin for your company, right?
Wrong. If you’re using one bank account, absolutely every transaction – in and out – is going to go through that account.
This is going to make life very tricky when it comes to completing your tax return. You’re going to have to sift through every single payment and distinguish between what was for business purposes and what was for general day-to-day living.
If you’re self-employed there are instances when you can claim expenses on food and drink.
Just imagine that there’s a popular sandwich shop (the sort that can be found on every city corner) that you frequent regularly.
When working on your tax return, do you really have the time (and patience) to go through your bank statement and ascertain what was a business lunch and what wasn’t? You’re a business owner, of course you don’t.
3. If HMRC comes calling, you’ll avoid some embarrassment
There are numerous reasons why a business may be investigated by HMRC, but for the purposes of this post, let’s say an honest mistake has been made (which is why you should consider using an accountant).
If HMRC are going through your business finances, you don’t really want them going through personal finances too, do you?
If you don’t have a dedicated business banking account, you’re giving them no choice. Plus, you’re making life that bit simpler for them, so probably expediating what’s bound to be a stressful process.
4. A business bank account makes planning, budgeting, and forecasting that much simpler
Yes, we’ve said it already. Separating your business and personal finances is a bit of a nuisance.
But having all of your financial information clearly laid out in front of you is key when it comes to planning for the future.
Forecasting is the process of looking over past and current data, to help you efficiently build a roadmap for the future of your business. And financial information plays an integral part in this.
Too many small businesses don’t forecast – or don’t forecast correctly – and a big reason for this is them being too strapped for time.
A business bank account will put that vital information at your fingertips, and depending on who you bank with – may even provide you with features to help you get it done correctly.
5. It will boost your business’s credit rating and give you the option of extra finance
By opening a bank account for your business, you’re taking an important step in establishing a solid credit rating for it. This is important if you need business finance in the future.
When considering your application for a loan, banks and other lenders will look at your credit history.
Not only will a healthy credit rating make the difference when it comes to your application being accepted or rejected, but it could also result in a more generous interest rate.
It’s worth noting that if you are a sole trader (or a very recently formed limited company), lenders will also look at your personal credit score.
6. There are features that will help your business fly
The rise of challenger banks has meant a wealth of handy features are included with most business bank accounts (normally via an app). Even the high-street banks are getting in on the action.
Instant notifications when you make a payment, payroll services, accounting software integrations, invoicing, expense management, ‘pots’ for different payments, money exchange, team member permissions – these are just some of the features that you can expect from the modern business bank account.
This is on top of the more traditional features that you would expect, such as debit cards, direct debits, and standing orders.
Don’t miss out, get all the help you can to help your business succeed.
7. Your terms and conditions may state that your account can’t be used for business
In some cases, you may not even have a choice, as your bank’s terms and conditions could state that your personal bank account can’t be used for business purposes.
So that’s that.
Common questions about business bank accounts
Are there any downsides to having a business bank account?
One word, fees.
Some banks will charge you a fee for making cash deposits/withdrawals as well as monthly or annual fees (often after a free period).
In comparison, personal bank account fees are scarce.
How long does it take to open a business bank account?
It depends on who you decide to bank with. It can take a matter of minutes or anywhere up to a month. The banks will often indicate on their site how long it takes to open an account, but it’s safe to assume that if the bank opening process is entirely online, the speed at which it is opened is generally hours/days rather than weeks.
Can a sole trader have a business bank account?
Yes, a sole trader can take advantage of the benefits of a business bank account.
Some banks will even provide specific sole trader business bank accounts.
My credit isn’t good. Can I still open a business bank account?
Yes. Not all banks will run a credit check when you apply for an account.
You can, however, expect a credit check if you are also applying for an overdraft.
What do I need to open a business bank account?
This depends on who you are opening an account with and what business structure you are trading as (for example, limited company or sole trader). You should expect to provide at least the below:
- Proof of ID (such as a passport or driving licence)
- Recent utility bill (normally dated within 3 months)
- Company number (limited companies only)
- Share certificate(s) (limited companies only)
When completing an online application, you will be told what you require before starting the process.
If you intend to open an account in a branch, we recommend contacting the bank beforehand (or visiting their website).
What is a challenger bank?
Also often referred to as online banks, digital banks, or app-based banks, a challenger bank normally provides its services completely online via an app.
They don’t typically have physical locations.
Common traits among challenger banks include easy, online account opening processes and app-based features, some of which have now flowed over into the services provided by the more traditional high-street banks, such as Barclays, NatWest, and Lloyds.
The latest figures indicate that 27% of UK adults have now opened an account with a challenger bank.
How do I pay money in and make withdrawals from a challenger bank?
If you expect to be dealing with cash regularly, we recommend checking that a bank’s cash options are convenient for you before signing up.
Let us help open a business bank account for your limited company
If you’re operating as a limited company, we can help you apply for the business bank account that is right for you.
We have partnerships in place with the best business banking providers in the UK, both traditional and challenger.
If you incorporated your company with 1st Formations:
- Log in to your 1st Formations’ Online Company Manager
- Click on the ‘My Companies’ box
- Click on your company name (or the ‘View’ magnifying glass icon)
- Select ‘Getting Started’
- You will be presented with the banks that are available (these currently include Anna, Barclays, Cashplus, Countingup, Mettle, Monzo, NatWest, and Tide – although the exact banks that appear for you may differ)
- Select ‘Add To Cart’ next to the account that you wish to open
- Select ‘View Cart’
- You will be directed to the ‘Delivery & Partner Services’ page – provide the contact information of the person that you would like the bank to contact
- Agree to the terms and conditions and select ‘Checkout Now’
- The bank will typically be in touch within 2 working days
Please note that we can’t guarantee that your application to open a business bank account will be successful.
The Online Company Manager
Don’t worry if you did not form your company with us, you can still import your company onto our Online Company Manager for free. You can then jump straight into the steps above.
There are a number of benefits to having your company on our Online Company Manager. Once your company is on the secure system, you can log in and make changes to your company (or companies).
Rather than having to enter your company number and company authentication code every time you log in, as you must with Companies House WebFilling, you only need to enter your company details once.
You can then appoint, edit and resign directors, secretaries, and people with significant control, change your registered office address, file a confirmation statement (£44.99 plus VAT), change your company name (£59.99 plus VAT), and much more.
To sign up to the Online Company Manager:
- Select ‘Click here to create an account’ on the dedicated page
- Complete the short form and agree to the terms and conditions, then select ‘Submit Registration’
- Click on the ‘Import a Company’ box
- Enter your company number and authentication code, then select ‘Search’
- Click on your company name
- You can then immediately import the company onto our system
So there you have it…
We have covered the reasons why you need a business bank account, common questions about business bank accounts, and the information you will need at hand to open one.
It doesn’t matter if you are trading as a limited company or as a sole trader, you are under no legal obligation to open a business account.
However, by not opening an account, you are making life that much harder for yourself (and your accountant). Plus, you are missing out on some features that could help your business grow and flourish.
So what are you waiting for? Get applying.
We hope that you found this blog post helpful. If you have any questions, please leave a comment and we’ll be more than happy to help.