Beginner’s Guide to Opening A Business Bank Account
Cash flow is the life’s blood of a business, and bank accounts are essential to managing cash flow. If you are starting a business, a key detail to take care of is setting up the right kind of business bank account. Making this effort up front could save you a great deal of time and aggravation in the long run.
How to open a business bank account
The following sections explain the steps involved in finding and opening a business bank account:
1. Separate business from personal accounts
You may be starting out as a small, one-person operation, so why bother with a business bank account? Well, if you are serious about your business, from day one you have to think of it as a different entity from yourself. After all, businesses and individuals have different needs, habits, and legal status.
Separating business from personal accounts will help you track the receipts and expenditures of your business more clearly. Also, since your personal tax status and that of your business may be different, it is much cleaner to keep things like interest and expenses separate. Finally, if the business were to go belly up, again, you would want a clear dividing line between your business and individual assets and liabilities.
2. Evaluate your needs
Before you set out to choose a bank, evaluate your needs. If you are primarily looking for an account to process payments, cheap and efficient checking and wire transfers may be your biggest focus. If you expect to accumulate significant amounts of capital, you might want to focus on the savings account rates banks offer.
Online banking
Ordinarily, online banks are the best place to look for both cheap checking and better savings account rates, but be advised that there are procedural complications with opening a business account online and limitations on what kinds of businesses can do so. A good approach might be to open an online account with a bank that also has a physical presence in your community. More and more banks are offering a choice between online and branch-based accounts, and opening an account in person while doing your banking online might enable your business to benefit from the rate and pricing advantages of online banking.
Another consideration is whether you expect to seek a business loan in the future. In that case, you might start to cultivate a relationship with a lending bank by opening your other accounts there. If you are interested in business loans, community banks are a good place to look. According to The Economist, while community banks make just 16 percent of loans overall, they account for 43 percent of small business lending.
3. Shop around
Once you have a feel for what your needs are, you can start shopping around to find the right bank. Depending on those needs, there are a variety of metrics you can use to identify the best banks for business accounts.
Two obvious points of comparison are (a) interest rates on deposits and (b) fees for checking and other services. There may be a trade-off between the two, as a bank with attractive deposit rates might also charge pricey fees. Evaluating that trade-off may involve doing a simulation of your balances and banking activity, so you can see which combination of rates and fees would produce the most favorable result for your business.
Depending on the nature of your business, you could also consider putting different types of accounts at different banks so as to take advantage of high deposit rates at one and free checking at another, for example. However, this may not be practical if your business demands that money be able to flow freely between accounts. Plus, a bigger relationship may give you more leverage to negotiate terms with the bank.
As important as interest rates and fees are, there are other factors which might also be relevant to your evaluation of business banking accounts. Processing times, for example, might be critical. How quickly a bank can make funds available and process payments may be central to how fluidly you can manage cash flow. Also, the extent to which you may need a line of credit or other lending relationship may influence where you put your deposit accounts.
4. Get formal
Once you have decided on a bank, there will be some formalities involved in opening the account or accounts you need. Every bank has its own requirements, and it will also depend on what type of business entity you have, such as a corporation or a partnership.
In any case, assemble the formal legal documents detailing the legal status of the company plus its management and authorized personnel. Having copies of these documents ready will help the process go more smoothly. You will also need to provide the entity’s tax ID number.
As the account is set up, make sure the bank puts the formal legal name of your business on the accounts and any documents such as statements and checks. Even if you use a more informal name in day-to-day business, using the formal legal name for banking purposes will help make sure payments are properly credited when the bank is interacting with other financial entities such as credit card processors.
5. Manage access
A crucial decision you will face is who has access to the account. Obviously, access should be restricted, and account numbers and passwords should be carefully protected. With that said, though, you may find it necessary to allow someone in addition to yourself access to the accounts so that management of company finances does not grind to a halt whenever you are not around.
Anyone you choose to have access should be a trusted employee, and it never hurts to do a background and credit check on anyone who is going to have financial access. It also might help to use a more restricted account for accumulated profits, to limit your exposure to internal fraud.
6. Put monitoring procedures in place
A final step in opening a business bank account is to put monitoring procedures in place. This is both for security purposes and to make sure you are making cash management decisions based on fully up-to-date information.
Monitoring involves reconciling between bank records and internal records, each of which may have information that has not yet been reflected on the other. It can also be helpful to have someone who doesn’t have the authority to direct bank transactions involved in the monitoring process to serve as an objective check.
All this care up front will help your cash flow run smoothly – and that may be essential to the survival of your business.
Frequently Asked Questions
Q: Where can I find information on high-interest business accounts? All I see advertised are accounts for individuals.
A: To a large extent, the same interest rates advertised for individuals should be available for business accounts at those same institutions. Just don’t expect to see much in the way of high interest these days. According to the FDIC, the average rate nationally is just 0.06% for savings accounts and 0.09% for money market accounts. Even the best rates these days are still around 1%.
The good news is that you might be able to leverage a business relationship into more favorable terms from a bank — it’s just that those better terms may not necessarily involve your interest rate. Here are some things to keep in mind as you search for the right bank for your business needs:
Do not expect a break on rates. You might expect that a business account is typically larger than the average personal account, so this size should entitle you to preferential savings or money market account rates. The problem is that banks really do not care much about large deposits these days. Jumbo accounts, which are deposits in excess of $100,000, receive no rate premium for savings accounts, and just 4 basis points extra for money market accounts. Banks are actually overloaded with deposits, and do not feel they need to offer higher interest rates to attract them.
Be especially careful about checking account fees. Since business banking tends to be transactional rather than passive, you may want to focus on the cost of your checking account needs rather than on savings account interest in choosing a bank. At today’s low interest rates, checking account fees can easily exceed savings account interest.
Discuss your banking needs as a package. It is fairly easy for an individual to choose separate banks for savings and checking, depending on where the terms are better. Businesses often need closer coordination for cash flow management purposes. Banks are going to be most interested in revenue-generators like credit lines and payroll accounts, and discussing your business needs as a whole should improve your negotiating position.
Be sure to shop around before you choose. Just be aware that services, interest rates and costs vary greatly from bank to bank. Do not choose a bank without doing some comparison shopping.
In general, business accounts are more active than individual accounts. In choosing the right bank for your business needs, start by projecting what type of activity you expect your business accounts to generate. Then, choose a bank based on minimizing the cost of that activity, and on receiving the quality of service that will help you do business seamlessly.
