Maximizing Your Business Finances: The Benefits of Opening a Business Bank Account
When a business idea arises and you are ready to launch your small business, chances are you are investing most of your energies, time and money in this project all on your own. It is also likely that your company has started operating from home, and your work and personal life have begun to mix.
In the initial phase of your business, it might seem natural to use your personal bank account to move funds in and out of your company. However, soon enough you might be asking yourself if it is really OK to use your personal bank account for business purposes, or if you should consider opening a dedicated business account. If your small business operates as a distinct legal entity, as a Limited Liability Company (LLC), or as a corporation, then you are legally obligated to separate your company’s finances from your personal finances. Although this does not mean that you need a business account, chances are many banks will request that you open one for your business’ operations.
Opening a business bank account to keep personal expenses separated from business expenses is advisable, mainly because it is an effective way to monitor your income and expenses when you start a new business activity, avoiding unpleasant surprises and unnecessary confusion.
It is important to be able to distinguish your personal expenses from your business expenses, not only for company owners but also for freelancers and small businesses, as otherwise it might become really hard to keep track of your finances. For those who registered for a VAT, it is not mandatory to open a dedicated business account, although it is highly recommended.
In this article, we are going to list several reasons why it is convenient to open a bank account for your professional activity, as well as the main expenses you should keep in mind:
Management of your finances
Opening a business account allows you to manage your finances more optimally. Keeping things in order helps you gain a clearer vision. Moreover, monitoring your inputs and outputs can help you understand what you can improve, where you might need to intervene and where to cut in order to successfully run your business. As previously mentioned, another benefit of opening a dedicated business account is that it prevents your personal expenses from mixing with your professional ones. On the other hand, if you decide to mix personal and business expenses, you need to be incredibly meticulous when it comes to keep track of your expenses, and this might add pressure to your already busy routine.
Protection in case of checks
Another perk of opening a dedicated business account is that you will be protected in case of Revenue Agency checks. It will be much easier to keep track of all the actions taken in your account, including all the invoices that have been issued, your expenses related to your business activity, leaving all the remaining expenses to your personal account (i.e. groceries, purchases for your family, tuition fees, bills, etc.).
On the other hand, if you choose to use your private bank account for your business, you must keep in mind that checks could happen anytime, and you will need to justify every action clearly and coherently. Make sure that every input and output is formally recorded, as failing to do so means that the agency could question some of the transactions or assume they have not been declared. A dedicated account saves you from all this trouble as you can very easily have an overview of your business’ situation month by month.
Nevertheless,you should keep in mind that a business account requires additional costs. According to the needs of each client, banks provide different options for VAT holders and businesses.
The additional costs are due to a series of benefits that personal bank accounts do not provide, such as limited personal liability protection and improved security with regards to personal information.
Professionalism
Another perk of opening a business account is that customers will be able to directly pay your company, through credit card or checks, and the funds are not going to transfer directly to you. In addition, you can authorize your employees to handle everyday banking tasks on behalf of the company.
This is important as it allows you to delegate tasks, while still keeping track of the situation and making sure that everything has been done correctly. In other words, a business account can increase your professionalism and allow you to keep everything under control.
Purchasing power
Business bank accounts can help you make big purchases to start your business and help you establish your credit history. Purchasing power essentially indicates how much a business is able to buy via cash or credit.
If your company is likely to make several purchases over time, it is easier to get special deals from vendors, but also better deals. The larger a business is, the more purchasing power it has, although there are alternative ways to increase your purchasing power, if your business is small.
If you pay vendors before the deadline or simply in a timely manner and consistently, this will allow you to have a good relationship with them and they might be more inclined to provide you with better deals, even if you don’t increase the quantity of your purchases.
Main expenses you need to be aware of
If you decide to open a business bank account, you should certainly take a few factors into consideration. Firstly, the discount rate, that is to say, the percentage your bank will charge for processing each transaction. Secondly, the transaction fees, or the amount of money your bank is going to charge you for each credit card transaction.
Make sure you also check the applicable fees for address verification service (AVS) and the Fees for the address verification service (AVS) as well as Batch fees (ACH). Another expense you need to be aware of is the minimum monthly commission, that is to say, an amount of money that is charged if your company does not reach the minimum amount of transactions required.
Once you have selected a bank that suits your needs, opening a business account is really simple. Just visit the website of your bank to find all the information on how to open an account.
You will need to provide several documents, including a UK business address, a UK-based company representative living in the UK who will be an account signatory, along with a document introducing your business plan and the reason why you need to open a business bank account in the UK, and a list of all the parties who share property of the business. Setting up a full business account in the UK can take up to three months, as the application needs to be reviewed and approved.
We hope you enjoyed this article about business accounts. If you found it useful, don’t forget to share it with a friend or colleague who is interested in opening a business bank account!