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Business bank accounts are specialised bank accounts that are targeted towards business owners as opposed to those you usually see which are targeted towards general/personal users. Although in the UK it is not a legal requirement for a business to have such an account (at least not for a sole trader) – business bank accounts do provide a variety of benefits and advantages over using a personal account to manage business-related transactions and finances.
If you are setting up a new business, or maybe you already have one set up – you should understand what a business account can offer your business and therefore allow you to make an informed decision on whether you should get one.
What Are the Differences Between a Personal Account and a Business Bank Account?
It is important to understand the differences between the two types of accounts before discussing whether a business account is necessary for your business.
Fundamentally personal bank accounts are designed to be used by individuals to carry out ordinary, day-to-day transactions, such as buying groceries or paying for car insurance and as the name implies are registered in the name of an individual for use in a personal capacity. Despite usually being registered to a single user, personal bank accounts can be used by by more than one user when the account has been set up as a shared account or joint account.
A business bank account, on the other hand, may at first glance have all of the same functionality and use cases as a personal account – However, since it is set up for a business it can have multiple signatories or registered users and is usually in the name of the business rather than any particular individual.
Opening a business bank account can often be far more onerous than opening a personal account and usually has monthly and transactional fees attached whereas most of these services are provided for free for personal account holders. This increased barrier to entry and fees provides businesses with access to specialised services that are not available to personal account holders and these are discussed below.
Key Reasons For Opening A Business Account
Professionalism and Credibility
One of the main advantages of using a business bank account over a personal account is that it adds a layer of credibility to the organisation as well as a more professional look and feel for customers and suppliers. Having a dedicated business bank account means all your financial documentation will be in the name of the business rather than an individual and will ensure everyone understands that they are dealing with a business rather than someone in a personal capacity.
Impressions matter greatly in business and those that interact with your business will form a negative impression if your business does not look to be professionally set up. Therefore, having the increased credibility and professionalism associated with operating a business bank account can strengthen the reputation of your business and bring in more sales and custom.
Increased Admin Efficiency
Another great advantage of having a business bank account is that it will greatly improve the administration of your business finances. For instance, when managing an organisation’s taxes, if a personal bank account is used then when it comes time to file taxes, you must sift through each and every transaction and determine if it was a business expense or not. With a business bank account, all transactions are business transactions and so a lot of time will be saved managing these. Even the smallest of businesses can benefit from this simple advantage, as it helps to keep business expenses separate from personal ones.
Additionally, bookkeeping is much easier when there is a dedicated business bank account, especially when using accounting software. Nowadays, accounting software that is designed to automate organisational bookkeeping can be connected directly to an account so having a dedicated business account is necessary. Being able to use software such as Xero, MYOB, or Quickbooks can decrease the manpower needed to manage an organisation’s admin as it can be done much more efficiently.
Impact on Business Credit or Lending
Having a business bank account is also massively important in regard to acquiring business credit or financial lending. When applying for both, a key factor that lenders will review is a company’s credit history, and having an established business bank account can play a large role in determining how much credit lenders are willing to provide to a business. With this in mind, it is best to begin using a business bank account as soon as possible to maximize credit history records, as it will greatly improve your business’s chances to acquire credit and loans in the future should the need arise.
Financial audits require going through lengthy amounts of a business’s finances and transactions to check that the company is operating in a tax-compliant manner, and are often conducted in segments that see the auditor looking at many years’ worth of financial information. Having a business bank account can alleviate many of the stresses related to auditing, as it will set a clear trail for auditors to follow. Many tax-tracking institutions and bodies such as HRMC are also very suspicious of those operating a business using a personal bank account, and so the auditing process could be a lot harder if it is being conducted on a personal bank account where personal and business transactions are being mistaken and are not separated.
Improved Analytics and Growth Tracking
By using a business bank account, businesses are also able to track their income, expenses, and profits much easier than if a business was sharing a personal account. Accounting software that can be connected to a business bank account such as Xero can provide businesses with analytical data that can be beneficial to tracking various financial aspects of a business, such as tracking profit margins and can even be utilised in decisions such as what can be done to reduce expenses of a company. By using this sort of information, a business greatly improves its finances and in theory, can improve the profitability the business generates by following and studying analytical data.
Future-Proofing a Business’s Finances
Another great reason to choose to use a business bank account over a personal one is that it can be used to future-proof a business operation by providing the business with planning, budgeting, and forecasting information when used alongside analytical data such as the trackers that can be seen by using accounting software. Forecasting, as the name implies, includes viewing past financial history and transactions alongside current ones to build a financial roadmap for the future of the company or business. This can be very important for a business to plan for the future, and to come up with financial strategies and plans on how best to manage their finances to optimize their business in the most efficient and effective manner.
To conclude, business bank accounts can be greatly beneficial to businesses as they offer a number of advantages for business owners.
In summary, operating a business bank account over a personal one can provide businesses with:
– Extra credibility and a professional image
– Improved financial admin efficiency
– Improved access to lending and credit options
– Easier auditing
– Analytical data
– Future-proofing finances
– Access to business specific services such as account software integration & category matching.
There are plenty of bank specific services offered to business owners and very few negatives other than some small banking fees which would not be incurred with a personal account.
In general therefore, it is almost a no-brainer for a business to set up a business account as soon as you setup your business. Here at Referandsave you can read about our exclusive offer at Tide Bank where you can get a bank account setup in 5 minutes without a credit check and get free company formation and £75 free cash here.