There’s a lot on your to do list as a new small business owner, freelancer or independent contractor: choose a business name, get a business license, decide on a business structure, and more.
Near the top of the list you’ll want to put “open a business bank account.” While it may not seem urgent, here are sixteen great reasons to open one now.
How a Business Bank Account Sets Your Business up for Success
Your business bank account can serve as the central command for your business finances. Income should be deposited into this account, and expenses should be paid from it. You may use a business credit card and other payment methods, but ultimately those bills should be paid from your business account so you have a clear view of your finances.
For most business owners, the first step is to open up a business checking account. You may want business savings account as well. You may be eligible for higher interest rates on money you keep in your business savings account.
Separate Personal and Business Finances
If you want to be successful in your business, separating your business and personal finances is a must. Without that clear line of separation, it’s incredibly difficult to understand whether your business is doing well or falling behind.
1. Avoid Personal Liability
Separating your business and personal finances can help limit personal liability.
If you have formed a limited liability company (LLC) or corporation, your business needs a separate business bank account in order to protect the legal integrity of that business entity. (If you operate your business as a sole proprietorship, there is no separate legal entity and your personal assets may be at risk if the business is sued. A dedicated business account is still a good idea for a sole proprietor for many of the reasons listed here.)
Note that personal liability protection from business activities depends on a number of factors, so always check with a legal professional for advice specific to your situation.
2. Deduct Business Expenses
As a business owner, you want to deduct as many business expenses as possible. This can help reduce the amount of taxes you owe.
A business bank account can make it much easier to keep track of business transactions to help ensure you (or your accountant) don’t overlook expenses that may be tax deductible. While paying for something from your business bank account doesn’t ensure a business tax deduction, it does make it easier to keep track of potentially deductible expenses.
If you use your business bank account exclusively for business purchases, you don’t have to wonder at tax time whether a purchase you made at a big box store or office supply store was for personal or business purchases. (Of course, the IRS still requires you to keep receipts for tax purposes.)
3. Better Budgeting
Not only is a business bank account helpful for tracking expenses, it can also be helpful for planning purposes. Mobile apps and cash flow tools can make it easy to monitor your business finances and avoid account fees.
Legitimize Your Business
You want to put your best foot forward with customers, suppliers and potential business partners. A business bank account can help.
4. Look Professional to Customers
When your customer needs to pay you, offering personal checking account information won’t engender a lot of trust. A business bank account is a much better choice.
5. Establish Business Credit
While a business bank account won’t directly affect your business credit scores, opening one is a recommended step when you’re wondering how to establish business credit. Again, the separation between business and personal finances is essential if you want to grow a financially healthy company.
Manage Finances Efficiently
Most business owners don’t have hours to spend on the financial tasks required to run a successful business. A dedicated business bank account can help streamline these financial tasks.
6. Accept Payments
If you invoice clients, get those payments deposited into your business bank account. Business checking accounts may offer invoicing, which can further simplify the process. If not, you can use your accounting software or invoicing software and link your bank account to accept payment.
7. Track Cash Flow
See your business cash flow at a glance and get a quick view of your business’ financial position.
8. Simplify Accounting
Having a dedicated bank account can also make it a lot easier to keep your bookkeeping up to date. Link or feed your business bank account data into your accounting software to make it easy to stay on top of your business financials.
Access Tools for Growth
Whether you want to grow a large company or just a lifestyle business, a business bank account can help.
9. Obtain Business Loans and Credit
Most small business loans require the business to meet minimum income requirements, and that those numbers can be verified. The most common tool lenders use to confirm revenues is business bank statements. (Some lenders will ask to connect to your bank account to verify income.)
10. Set Up Merchant Services
If your business accepts debit or credit cards, you’ll need a merchant account for those payments. From there, funds can go directly into your business bank account so you can keep track of your business funds.
11. Pay Employees and Contractors
Whether it’s payroll or 1099 payments to contractors, you’ll want to make those payments from a business account not a personal one.
Safeguard Your Funds
Mingle your business and personal funds in a personal bank account and you face additional risks.
12. Prevent Fraud
While you can’t prevent every type of fraud, segregating accounts can reduce the chances that business funds are compromised because a crook accessed a personal check or debit card.
13. Protect Against Personal Misuse
Family members or others may have access to your personal accounts which could leave those funds vulnerable to misuse. Keeping a separate business account—and limiting access—can help you keep those accounts safe.
14. More FDIC Insurance
Business bank accounts can also be eligible for FDIC insurance. Combining personal and business funds in one account may put the account over the limit for FDIC insurance limits. Look for a bank that is a member FDIC, and be sure to review FDIC insurance limits to ensure coverage. (Credit unions can be covered by their own deposit insurance organizations.)
Prepare for the Future
A business bank account is just one step in building a financially attractive company.
15. Attract Investors
Whether it’s preparing the financials for your pitch deck or entering into the due diligence process, you want your business financial data to be squeaky clean if you hope to attract investment capital.
16. Qualify for More Financing
Strong business revenues will help your business qualify for more financing, and often at better terms. A business bank account helps document those revenues for lenders. Have as much business income as possible deposited into your business bank account. For example, if your business accepts payment by PayPal, don’t withdraw funds directly. Transfer them to your business bank account first.
Bonus: Tips for Choosing a Business Checking Account and Building Credit
There are more choices than ever for freelancers, independent contractors and new business owners to find a business bank account that meets their needs. Some banks that cater to small businesses with free business checking accounts that don’t require high minimum balance requirements to avoid monthly fees, for example. Many offer offer ways to reduce or avoid transaction fees.
When you open a business bank account, it’s helpful to have the following information handy:
- Business name and/or fictitious name (DBA)
- Social security number and employer identification number (EIN)
- Personal identification
- Articles of organization for the business (if available)
- Personal and business addresses and phone numbers
As an added bonus, that business information (business name, address, phone number etc.) will be helpful when building business credit. Keep this info handy for times when you apply for a small business loan, line of credit, or even supplier or net-30 vendor financing. Filling out applications with consistent information will help you minimize errors on your business credit reports.
In addition to opening a business bank account, it’s a good idea to get a business credit card. Your bank may offer one, but feel free to shop around to find one that’s the right fit. Most business credit card issuers report to business credit bureaus, and on-time credit card payments can help build your credit history.