Which bank account to use for small businesses?

A successful small business requires effective financial management. Selecting the appropriate bank account is one of the most crucial choices in this regard. Small businesses in the UK have access to a variety of bank accounts, each with unique benefits and drawbacks. While a small business can have as many bank accounts as it needs to manage its finances efficiently, it is crucial to carefully evaluate the needs of the company and open only the number of bank accounts required to meet those needs.

This article offers a thorough overview of the factors that small businesses should take into consideration when selecting a bank account.

Firstly let’s understand what kinds of bank accounts a small business can have.
The UK's financial system has a variety of functions for payment systems, traditional banks, and online banks. Banks are financial institutions that accept deposits from people and institutions and use the money to create loans and make investments, whereas payment systems are created to make it easier to transfer money between two or more parties. High-street banks are conventional financial institutions with a local presence, whereas online banks only conduct business online.

Businesses in the UK have a variety of options when it comes to managing their finances. Savings accounts, loans, and credit cards are just a few of the financial services that high-street banks provide. They also provide a physical branch presence and customer service in-person. But high-street banks frequently impose fees for a variety of goods and services, and they might have rigid lending criteria or other limitations that make it challenging for businesses to raise money.

On the other hand, payment systems have many advantages, including better cash flow, increased sales, and cost savings. For companies looking to grow their clientele and provide practical payment options, they can be a good choice. Payment systems, however, frequently charge transaction fees for each transaction that is processed, and they can present security risks like hacking and data breaches.

When it comes to managing their finances, businesses in the UK have a lot of options. The most advantageous choice depends on the unique requirements and priorities of each business. High-street banks and payment systems each have advantages and disadvantages. Another choice to think about is using an online bank, as many of them provide lower fees and more flexibility than traditional banks. In the article What is the difference between payment systems and banks?, you can read more about these differences in detail.

Can small businesses have several bank accounts?
A small business is allowed to have as many bank accounts as is necessary to effectively manage its finances. A small business in the UK is allowed to have an unlimited number of bank accounts.

However, having an excessive number of bank accounts can increase bank fees and make it more difficult to manage your finances. Therefore, it's crucial to carefully consider your company's needs and only open the necessary number of bank accounts to meet those needs.

Many small businesses opt to open a primary bank account for day-to-day operations and a secondary account for savings or other particular needs. Additionally, some businesses may decide to open additional accounts for use with various currencies, international transactions, or various projects or departments.

Before opening numerous bank accounts, take into account the expense of maintaining them, including charges for account management, transactions, and other services. To prevent confusion or errors, it's also crucial to make sure that your bookkeeping and accounting systems can handle multiple bank accounts.

When selecting a bank account, what should I consider?
Think about the following elements when selecting a bank account for your small business:
  • Fees: can reduce your profits, so look for bank accounts with little or no monthly and transaction fees;
  • Features: Take into account the features you require, including debit card, overdraft facility, mobile app, and online banking;
  • Support: Check the bank's support service, including customer service and access to business advisors, before you make any decisions;
  • Interest rates: Comparing the interest rates offered on deposits and overdrafts will help you understand the market;
  • Eligibility: To be eligible for the account you are interested in, you must first confirm that you meet the necessary criteria, such as turnover or credit score.

What different types of bank accounts are there?
For small businesses, there are several different types of bank accounts available in the UK, including:
  • Business Current Accounts are the most typical kind of bank account for small companies. Paying bills, sending payments to others, and managing your finances are all made possible;
  • Cash Management Accounts, these types of accounts, you can still access your money while earning interest;
  • Merchant Services Accounts let you accept credit and debit card payments from clients;
  • Foreign Currency Accounts are available, which can be helpful if you conduct business with clients from abroad;
  • Savings accounts, you can use these accounts to earn interest on your money, though there may be restrictions on how many transactions you can make;
  • Deposit Accounts, with these types of accounts, you can invest your money and earn interest over a predetermined time frame;
  • Community Accounts, some banks provide these accounts to assist neighbourhood social enterprises and community organisations.

Consider your small business's needs, finances, and long-term goals when selecting a bank account. To find the bank account that is best for your company, make sure to compare the fees, interest rates, and features of various accounts.

Why is it not recommended to use a personal bank account for small business needs?
Using a personal account for a small business can lead to a number of issues, including:
  • Legal and tax issues: Using a personal account for business purposes can result in legal and tax complications, making it challenging to separate personal and business finances. Problems with accounting, taxation, and legal compliance may result from this;
  • Limited features: Personal accounts are made for individual use and may not provide the features or services that a business would require, such as merchant services, overdraft facilities, and online banking services made specifically for businesses;
  • Fraud risk: When conducting business using a personal account, there is less protection for business funds than there is with a separate business account;
  • Inaccurate financial records: Using a personal account for business transactions can make it more difficult to maintain precise financial records, which can lead to errors and discrepancies;
  • Professionalism: Using a personal account for business transactions can give the wrong impression about a company to clients and suppliers.

Due to these factors, it is always recommended for small businesses to open separate business accounts in order to manage their finances efficiently and stay compliant with all applicable laws and regulations. A business account will also give you the resources you need to manage your cash flow, monitor it, and make wise financial decisions.

For small businesses in the UK, selecting the appropriate bank account is an essential choice. Businesses must evaluate their unique needs to make informed decisions because payment systems, brick-and-mortar banks, and online banks each have different benefits and drawbacks. Businesses can enhance cash flow, boost sales, and cut expenses by selecting the appropriate bank account. In order to avoid fraud risk, limited features, and legal and tax complications, it is always advised to open a separate business account rather than using a personal one. Persona Finance's team of chartered accountants is available to give you direction and assist you in maintaining and enhancing the financial aspect of your company. For advice please contact us via the website or email .
Accounting and Finance