In this article, we discuss using a business bank account for your business or side hustle: whether you need one legally, what are the benefits, costs and features, how to choose the best option, and how to open an account and use it effectively.
Whether you are just starting out as a small business or have set up a side hustle to make a bit of extra cash, it may be a good idea to think about applying for a business bank account. Here is some key information that should help you on your way.
What is a business bank account?
A business bank account works much in the same way as your personal bank account, e.g. you can set up direct debits, transfer money, cash in cheques and have an overdraft facility.
Your current bank might offer a business account, but it’s a good idea to shop around and compare what would be best for your particular business. Check what services are offered and what charges apply: some business accounts charge a monthly fee for banking with them, others charge for specific transactions. Some banks offer an initial discount or fee-free period for start-ups, whereas others offer limited services for free.
Do I need a business bank account?
Whether you need a business bank account depends on the type of business you are running.
If you have set up a limited company (i.e. registered at Companies House) you will need to open a dedicated business account. That’s because a company is a separate legal entity from yourself. Its finances must be managed separately because the money belongs to the company, not the director(s).
If you’re self-employed, a sole trader or in a partnership, a freelancer or contractor (e.g. designer, journalist, web developer) or work in the gig economy (e.g. Uber, Deliveroo), you are not legally required to have a business bank account. In these cases, the law and taxman regard you and your business as the same thing.
You can use your normal bank account for business-related transactions or open a second free personal account to keep your finances separate (although terms and conditions of a personal account may state that you’re not allowed to use it as a business account).
What are the benefits?
Even if it’s not a legal requirement, if you’re self-employed, it can be very helpful to have a dedicated business account. Here are some reasons why:
- It’s quicker and easier to manage your finances: separating personal from business transactions simplifies book-keeping and completing your tax return. You’ll know you have accounted for all your business income, and you can see all of your business expenses in one place, whether that’s fuel receipts, office costs or equipment etc.
Keeping your personal expenses separate, makes it easier to budget and save, and it also means HMRC won’t access your personal finances.
- A separate business account enables you to clearly see how much money your business is making and when you can afford to invest in different things for your business.
- Borrowing: you can apply for a business credit card and take out a business loan. (Most lenders would not consider you for business finance if they have only personal account information). By having a separate account, you can start to build up a credit history for your business.
- Having your business name on your bank account can help you to look more professional to your clients
How to choose an account
What features do business bank accounts offer? Just as with your personal account, they can handle cash, cheques, direct debits and standing orders, you’ll have a debit card and may be offered an overdraft facility.
A business account will enable you to accept card payments from customers, and to apply for business finance when necessary.
Different banks offer different features, so it is important to read the terms and conditions before applying for any account, to check that it will fulfil your needs. Some key things to look out for are:
- Are there monthly fees for holding the bank account?
- Are there fees or charges for transactions e.g. making cash deposits and withdrawals, paying in cheques, or for other online transactions?
- Is there a fee-free introductory period? (Make sure it is still your best option once the offer ends, as it can be time consuming to change business accounts).
- Does the bank have FSCS (Financial Services Compensation Scheme) protection?
- Is there a minimum or maximum balance set by the bank? Do they charge fees if the balance is too low or high?
- Do they offer an overdraft facility that allows you to borrow money in the short term, and if so, what is the limit and what interest and charges apply?
- Foreign transactions: If you’ll be dealing with overseas clients or suppliers, compare the banks’ costs and service for processing foreign currency transactions.
- Does the bank have High Street branches, telephone banking or is it solely online?
- Will you be allocated a personal adviser who can get to know your business, and whom you can contact directly to help with your business needs?
Some banks offer more advanced features, such as syncing your account to online accounting software like QuickBooks, or using pots to save your tax for you, or for your employees’ wages etc.
Business banking apps are also becoming more popular, including Monzo, Starling and Tide. Ready access to your finances can be helpful in guiding decisions, and some apps offer extra features such as creating invoices or instant notifications of transactions.
How do I open an account?
Firstly, do your research to find out which is the best option for you and your business. Search comparison sites online but also take time to speak to advisers and don’t be afraid to ask plenty of questions. Most major banks won’t actually let you open a business account without speaking to one of their advisers, though you can sometimes start the application process online. You might wish to open an account with your existing bank who may offer a switching service.
To open an account, you will need some ID (e.g. passport, photo driving license) and proof of address (e.g. recent utility bill, bank statement).
For limited companies and partnerships, you will need the Companies House registration number and business address.
Each bank may subject you to further checks such as who else may have access to the account, your estimated annual turnover, your personal credit history etc.
There may be some eligibility criteria such as a maximum turnover or a minimum balance.
How to use a business bank account effectively
You will use your business bank account much in the same was as your personal current account. You can send and receive money and track your finances.
When making purchases or paying for services using your business account card, you should always keep records of your receipts – which may be physical copies or online – in case you need them as proof when it comes to filing your tax return. You must keep your records for at least five years in case HMRC want to check them.
When taking payments from clients or customers, whether they are paying online, transferring money or paying by cheque or cash, make sure all earnings go straight into your business account. It is a good idea to immediately take 20% out of your earnings (as tax) and put into a separate account ready for when you pay your tax bill.
Try to calculate your monthly expenses and set up direct debits where necessary. You should keep track of the funds in your account, as some banks may have charges or interest on overdrafts or may only allow you to spend the funds that are physically in your account. You might have got used to your student or graduate overdraft saving you when you had insufficient funds in the past, so it’s is important to keep an eye on this with your business account!
Try to get yourself into the mindset that the money in your business account belongs to your business, rather than yourself. You may like to pay yourself a wage from your business account into your personal account, but don’t use your business account or card for any personal expenses.
Find out more about business banking:
Find out more about self-employment:
Self-Employment – HelloGrads
Types of self-employment, tips, tools & resources, plus the pros & cons of working for yourself