There are several things that can make a business seem “legit”; a well-curated website, up-to-date contact information, and all required licenses and permits, to name a few. However, if you really want to increase your chance of growth and success, then there is thing you really need to get– a business bank account.
The importance of opening a business bank account
In Nav’s 2018 Business Banking Study, we found that in the last two years, 70% of small business owners who did not have a business checking account were denied access to much needed loans. Even more troubling was that those who did not open an account were two times as likely to consider closing their business when compared to those who had an account. Why? 50% of them cited an inability to access capital.
Aside from keeping personal and business finances separate (which you should) a business bank account does do two very important things: makes tax time activities much easier and helps build a financial history that can be used when seeking out borrowing opportunities.
For some of us, filing personal taxes can be challenging enough, but throw business receipts in there and things can get downright ridiculous. When you’re using your personal bank account to manage your personal and business needs, deciphering what receipt, line items, expenses, etc. fall into which category (business or personal), it’s easy to make expensive mistakes, some of which can cost you valuable business deductions come April. By opening and using a business account to manage things like inventory purchases, payroll, and even meal and mileage expenses, you create a clear line between business and personal.
With so many business owners expressing an issue with cash flow and access to capital, it’s clear that being able to borrow money is a must during both the early and later stages of business ownership. In this sense, a business account because a historical record of your business’s financial health, allowing lenders to see your business as a legitimate entity with a cash flow trail that can be followed back over several months. This record is often requested by lenders, and in some cases, can increase the likelihood that you’ll be approved for a loan, line of credit, etc. when you need it the most.
Opening Your Own Account
To open your own business, you’ll need to show proof of legitimacy, including your identification card, an established address, applicable business licenses, document of legal incorporation, and your tax identification number (EIN), though an Social Security number may suffice if an EIN is not applicable.
Assuming you have all those things ready and available, the next task if choosing a bank. Not all banks are created equally and that’s certainly true when it comes to business banking. Here are a few questions to ask before you make your decision:
- How much will it cost me? Many banks offer free checking accounts, but that doesn’t mean the service is free of all charges. Before opening an account, ask for a thorough explanation of the fee structure. Some banks may charge for writing a check, using the atm, credit card processing, or even receiving a monthly account statement. Don’t forget to consider the future needs of your business, as some fees that don’t apply in your current state of existence may become relevant as you grow.
In addition to the fee structure, it’s also important to find out how much money you’ll need to have in the account at any given time and the penalties for not maintaining that amount.
- What is considered a “monthly transaction”? Many banks place a limit on monthly transactions, but not every bank defines “transactions” in the same way. Typically, those transactions will include withdrawals, deposits (cash or check), and any checks you write. However, some banks may even consider electronic payments as monthly transactions.
- What are other’s saying? What are other customers saying about their experience with the bank you’re considering? Though every business has a few unhappy customers, a trend in service complaints should act as a red flag.
- What are your expectations? What do you want from your bank? Are you looking for access to top-notch online banking access? A personalized customer experiences every time? Investment or banking advice? Automated billing? Make a list of things you’d expect from any lender and use it to make your final decision.
For a business to be successful, it must be legitimatized in the eyes of customers, employees, the government, and in this case, even the world of banking. Opening and using a business checking account should be an essential part of your long- and short-term goals, as it can be a valuable tool in everything from yearly tax activities to any future borrowing needs.