More than a quarter of small businesses rely on a personal bank account instead of a dedicated business account¹, and almost half use personal credit cards.² If you have any employees and more than one or two transactions a month, you need to separate personal and business funds. Today’s article is a step-by-step guide to choosing a business bank account.
Why do you need a business account? Well, it’s vital to accounting, tax, capital, and client relations. Here are the specifics:
- Business Expense Tracking
- Accounting Software Integration
- Access to Business Loans and Lines of Credit
- Tax Reporting
- Protection from Personal Liability and Debt
- Credibility with Clients and Partners
Before we talk about how to choose a business bank account, let’s go over the documents required to open one.
Starting a business bank account
As soon as you successfully apply for and receive an Employer ID Number (EIN),³ it’s time to start a business bank account. I recommend opening a checking and savings account immediately.
If you’re incorporated as a partnership, corporation, or LLC, a separate business account is necessary for all intents and purposes. Here’s what you need to bring (or submit online) to open an account:
- Driver’s License, ID card, or Government-issued ID
- Employer Identification Number (EIN)
- Business Structure Documentation (articles of incorporation or LLC documents)
Texas does not require that you hold a business license, but be sure to bring any relevant permits, certifications, or registrations that are directly related to business activities. If you have a partnership or ownership agreement, bring that document, as well.
What’s a business checking account?
It’s similar to a personal checking account. Business owners can deposit and withdraw funds from branches or ATMs, send and accept ACH payments, and make payments via check and debit card.
But there is a difference. Business checking accounts charge higher fees than personal checking accounts and are more complex to navigate.
What’s a business savings account?
Business savings accounts serve a different purpose. Your savings account is a place to keep rainy-day funds—cash-on-hand for emergencies or sudden opportunities requiring cash investment.
What to look for in a business bank account
Here are five of the most important criteria to consider if you want to know how to choose a business bank account that’s a good fit now and in the future.
1) The Right Features
Here are the most common features you should consider:
- Bill Payment
- Wire Transfers
- Check-Writing
- Business Credit Cards
- Online and Mobile Banking Access
- Safety Deposit Boxes
Not all of these will be relevant to you, but many of them will.
You can also open multiple accounts to take advantage of different features, but things can get complicated fast. Remember: one of the purposes of a business banking account is to make your accounting processes easier. Don’t get fancy.
There’s no one-size-fits-all list of features and options. Keep an eye out for what makes doing business seamless and scalable.
2) Fees & Limits
Most bank accounts come with a number of fees, including
- monthly maintenance fees;
- overdraft fees;
- wire transfer fees; and
- transaction fees.
For small dollar amounts, online-only banks offer some of the lowest fees. But there’s no replacing access to a brick-and-mortar bank branch and in-person consultation.
That brings us to limits. Depending on your bank and account, you’ll face limits on transactions, deposits, and withdrawals.
Transaction limits may apply to the number and type of transaction. Deposit and withdrawal limits vary. If the majority of your business transactions involve cash, be sure to examine deposit and withdrawal policies closely.
Beware of volume-based transaction fees and limits, especially if you’re looking to grow. Choose a checking account with headroom.
3) Annual Percentage Yield (APY)
Right now, business savings accounts are topping out at around 4% annual percentage yield (APY).⁴ On the low end, you’ll see some with a .01% APY, which is a massive difference.
Certain accounts, called high-yield savings accounts, offer a higher than average interest rate, which can be a significant value add for a small business.
If you opt for an account with a low APY, it should have other significant features to compensate for the lost interest.
4) Customer Service & Access
For those businesses that frequently deposit cash or checks, the convenience of a physical branch can be a factor. Otherwise, you’ll probably have to deal with less flexibility and fewer services — issues that can be alleviated by going to a bank branch and speaking person-to-person.
What about ATM access? Although online banks may offer ATM access, it’s important to consider the size of their network to avoid surcharges for using an out-of-network machine.
5) Online Experience
Before you make your final decision, review the bank’s internet and mobile experience. Is it easy to work from your computer? Does the bank offer a robust mobile app that’s intuitive and fast?
As a business owner, you should be able to work comfortably from your phone. Over the coming years, mobile will become more and more dominant as an access point.
Here are my final thoughts
There’s always a give-and-take between categories. For example, the banks with the highest interest rates tend not to have brick-and-mortar locations.
You’ll need to decide which is more important to you. And as your business grows, you’ll probably want to open more accounts to stay organized and take advantage of perks.
If I could provide just one takeaway on how to choose a business bank account, it would be long-term usability and scalability. Shop around. Don’t settle. Choose an account that will take you into the future.
As always, I’m available if you want more specific information. Feel free to dial me directly at (682) 224-3243.
Talk soon,
Jeremy A. Johnson, CPA
References
- Benefits of having multiple small business accounts [Internet]. Axos Bank. 2023. Available from: https://www.axosbank.com/blog/Why-You-Should-Have-Multiple-Small-Business-Bank-Accounts
- Carbajo M. 10 stats that explain why business credit is important for small business. Sba.gov. 2023. Available from: https://www.sba.gov/blog/10-stats-explain-why-business-credit-important-small-business
- Open a business bank account. U.S. Small Business Administration. 2023. Available from: https://www.sba.gov/business-guide/launch-your-business/open-business-bank-account
- Payne K. Best business savings accounts of April 2023. Forbes. 2023. Available from: https://www.forbes.com/advisor/banking/savings/best-business-savings-accounts