There are no ifs, ands or buts about it – you need a business bank account. Business bank accounts are not only a legal necessity but are also an essential element of a successful business operation. Bank accounts are how you manage and protect your assets and cash flow. Therefore, it’s very important to make sure that you have one that makes sense for your business.
But did you know how many different types of business bank accounts there are available to choose from?
Due to this variety, figuring out what type of bank account you need for your business can be confusing. But ask yourself this: what do you need from your business bank account? Do you need multiple accounts for payroll, taxes, or operational expenses? Do you want a savings account for emergencies? Or do you just need a regular business current account?
Once ask yourselves these questions and you know what you need from your money management, you can begin to make an informed decision about which account(s) is for you.
It’s important to know that each of the accounts offered and the specifics of what is offered from those accounts varies between providers. Make sure you do your research and compare the pros and cons of each account to find one that works for you.
It is ultimately your choice to make. But this article will help narrow your option down to the four most useful bank accounts available for your business.
1. Business Current Account
A business current account is the most basic bank account available for businesses. It works exactly the same as a personal current account. You can execute fundamentally the same actions as a regular current account.
It keeps your money safe and protected, you can deposit money in, withdraw money in cash, you can utilise money transfer services either by electronic or wire transfer, you can cash cheques, and make payments from the account to any accepting retailer.
Alongside these functions, many business checking accounts also integrate with popular business tools, including accounting software. This can be beneficial to businesses, as it can help automate transferring transaction details. It breaks these transactions down into different accounting categories so you don’t have to and can streamline the process to make it more efficient.
You can add to or take away from your current account balance as much as you like. However, business.org warns that some banks will require you to maintain a minimum account balance in order to keep the account open. This is not usually a high amount, but it is a standard practice to keep in mind when choosing an account.
Because business current accounts are so readily available, they more often offer online platforms and internet banking. This is a huge benefit because it means that users are able to access their money and accounts anywhere through apps or online tools.
Business current accounts are one of the best accounts to have because they have the least restrictions imposed on them. With this type of account, you have easier access your money whenever you want or need to. This is a bigger advantage over a business savings account, for example, that can restrict the amount of fee free withdrawals or deposits you can make a month.
However, even though it will be a smaller rate than a savings account, some banks may still limit transactions and withdrawals on business current accounts. This is due to its business nature. You should ensure that you check this before you open the account, as it can incur fees.
Despite this, they are cheap accounts to run and to open in terms of the opening deposit. Some accounts may charge a fee to run, but there are many fee-free business current accounts to be found from a variety of different providers.
Software blog ‘the blueprint’ explains that to combat this, one could look for an online business checking account. Many of these don’t have transaction limits at all. Now this can incur some difficulties if you prefer brick and mortar stores or need to make deposits often via ATM. The in-person services of online banks are limited, but it may be worth giving that up for more account freedom.
A downfall to business current accounts is that they do not incur interest on the money in them. Usually, current accounts that offer interest in the form of an Annual Percentage Yield (APY) (an interest bearing current account) only offers a relatively low rate of return, usually always less than 1%. These accounts are also very few and far between, and difficult to find and open.
Business owners should at the very least have this type of account. It is a good base to begin with, and the versatility it provides means that there a variety of different things you can do with it or use it for.
2. Business Savings Account
Again, a business savings account is a relatively basic account type. A business savings account runs very similarly to a personal savings account. So, if already you have personal experience with them, you’ll already be in the driver’s seat! Some business savings accounts require a minimum deposit to be maintained at all times.
One of the main differences to a standard business current account is that a savings account accumulates interest. These can be beneficial if you want to save money for emergencies, to provide for the future of your business, or just to protect your money.
The safety of business savings accounts is a big draw. In the UK, business savings accounts are protected by the Financial Services Compensation Scheme (FSCS). The first £85,000 in the account is protected against bank or firm failure or mismanagement, and you can be compensated accordingly if this is the case.
On the other hand, they often limit your access to the money in the account. For example, some banks can restrict you to a certain number of fee-free withdrawals or deposits per month. This means that after a set limit, you will be charged for any new withdrawals or deposits.
While this can be less restrictive than many business checking account transaction limits, but it is something worth looking into if you are making deposits or withdrawals often. You don’t want to be unknowingly charged!
These accounts can be costly to operate, as they are rarely free in terms of monthly fees or transaction fees. They can also have a higher opening deposit than a regular current account. This can be a negative for some people, as the cost can sometimes be too great to recoup through the interest gained. Make sure you weigh up your investments so you can make the biggest and best return!
3. Business Recurring or Fixed Deposit Account
A recurring or fixed deposit account is relatively similar to a savings account. First, we must note the difference between a recurring deposit and a fixed deposit.
A recurring deposit. This is when you deposit a set amount of money at a fixed period per annum. An example of this would be a £50 deposit into your account every month. This starts saving habits and helps slowly build a reserve of money over a period of time.
A fixed deposit. This is a one-time deposit into an account. You decide alongside the bank before you open the account the amount you would like to deposit and the interest rate you will incur. This type of deposit often also has a higher interest rate than a recurring deposit.
So, with this type of account, you deposit a set amount either in a fixed or recurring manner. In turn, you accrue interest on that investment over a set period of time. The interest earned is also set and agreed upon before the account is opened and cannot be changed throughout the duration of the account’s existence.
This ensures that you make a guaranteed return on your investment with no chance of losing out. The rate of interest is usually based on how much you deposit, and whether it is a fixed or recurring type. So, the higher your deposit, the higher the interest rate.
The time that the original deposit remains in the account is dependent on each bank and each contract but can be anything from overnight up to ten years in the UK. It must be noted that you cannot withdraw the money for the agreed upon term. Some banks may waive this term if your deposit is below a certain amount (usually £50,000) but this is nearly always in forfeit of a fee of a certain period of interest.
This may be a drawback for some. You need to ensure that the money you put into this type of account is money that you feasibly will not use between the submission date and the contract end.
A benefit of this type of account is that the amount you deposit, the length of contract term and interest rate are agreed upon beforehand. Therefore, you know exactly how much profit you are making from the beginning and can plan ahead with it in mind.
This can be good for your business if you have a large income and want to save a net sum for a set date in the future, maybe for a future plan or investment milestone. It’s a great way of earning passive income on an amount of money you may not need to use for a set time.
4. Merchant Account
A merchant account is fundamental to have. This is particularly true for any small business that accepts credit or debit card payments. This type of account works specifically as a holding account for paid in funds. It keeps the money safe while your business and the customers bank provider processes the payment.
Startups.co.uk explains that this is because when you make a sale, the money doesn’t pass straight into your bank account – it first needs to be authorised (by your customers’ bank) and processed (by your merchant account).
Merchant accounts charge a small processing fee. This is deducted from that payment before the money is put into your account. As standard, it can take anything between one to three working days for payment to fully process and be cleared into your account. This is to ensure fraud protection and that the funds clear without any issues.
There are fees associated with this type of account, like with many business accounts. This can include monthly, set up, or transaction fees as standard. This can sometimes get expensive, so you should make sure you know these fees upfront.
There are four main different types of merchant accounts. There are:
Aggregate Merchant Accounts. These are the most common types of these accounts. They come with no set up or monthly fees, and you are only charged when sales are made. An aggregate account aggregates similar businesses together via an industry code.
This is to create a group of sub-merchants to a company acting as the main merchant – just like subleasing a property. This makes the account cheaper to run because you are not alone, but also doesn’t affect your individual credit score or finances.
Independent Sales Organisation (ISO) Merchant Accounts. Unlike an aggregate account, an ISO is an account dedicated to you specifically. This means that the account is more flexible, and you can better tailor the account to you and your business. But you will be charged for set up and monthly fees for this account.
They also have high earning thresholds for the businesses using the accounts, so it may not be good if you aren’t turning a big profit. They also require a high credit score and a detailed credit check, so those with little to no credit score may be rejected.
High-Risk Merchant Account. This can be a great option for people with bad credit, or people in industries that are considered high risk. This can be sectors like the travel, subscription services or online healthcare services.
Internet Merchant Account. This type of merchant account is necessary to be able to accept payments online. Therefore, they are crucial for ecommerce businesses. If you are an online business, you need one of these accounts even if you already have another type of account. These accounts also incur transaction charges and set up fees, so keep an eye on those!
A negative aspect to a business merchant account is that you my need a good credit history to open one. This is especially true for independent sales organisation merchant accounts due to their individual nature.
These accounts can be contract based, which can be a drawback for some people. Some contracts can be a minimum of three years long, for example. It is very important to make sure that you read the fine print and know what you’re getting into with any account!
Utilise this list as a springboard for your research. It is not an exhaustive one, but these are the most useful types of bank accounts for businesses in the UK. Make sure you shop around for the best account type and provider for you. For the latter, utilise the free tools at your fingertips.
A great recommendation is comparison websites, such as Which? Or Compare the Market. Regardless of any extenuating factors, you’ll need a business bank account to comply with UK law. So, make sure it’s one that will have you reaping the most benefits and rewards!
The right business bank account can ensure you have a better control, understanding and management of your business finances, so don’t be afraid to spend time on your choice! It is ultimately an investment, so treat it as you would any other!
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We understand that choosing the right type of business bank account can be stressful. Here at Count, we are committed to helping you make the best choice. Feel free to contact us here today!