What is a business bank account and how does it work?

Juggling your firm’s finances and household budget can be tiresome, but if you use one bank account for both,  there’s also a risk that the two could become confused. A business bank account ensures that your work and non-work money are kept separate. 

This guide explains what a business account is and how it can help you run your firm more efficiently.

What is a business bank account?

A business bank account is just like any other at its core – it allows you to make cash deposits,  withdrawals and online and bank-to-bank payments. What sets a business account apart from a personal account is that it is used exclusively for business transactions, with the account being opened in the name of a business rather than an individual.

Who needs a business bank account? 

Separating your business and personal finances is not just a handy way to maintain control of your income and outgoings, it can also be a legal requirement. If you’ve registered with Companies House as a limited company, you and your business are considered separate entities in the eyes of the law. This means limited companies must have business accounts for their business finances. 

Of course, business accounts aren’t just for limited companies. The benefits can prove attractive to small start-ups, small to medium-sized enterprises (SMEs) and larger companies.

What are the advantages of a business bank account?

There are several benefits to using a business account rather than a personal one for your work dealings, including:

• Streamlining your accounts

Keeping your business and personal finances separate makes it easier to keep track of your business dealings, ensure you’re meeting goals, and put enough aside to cover your tax bill. 

Conversely, it’s much harder to distinguish work expenses from social spending if you use one account for personal and business transactions. For example, you may find it hard to remember whether a train ticket was for a day out with the kids or a visit to a client if you see a payment to a rail company on your bank statement several months later.

• Smooth operations

Business bank accounts typically come with some work-orientated benefits that can make processing income and outgoings easier. These include segmenting payments – such as staff salaries and invoices – making foreign currency transactions and running credit checks on clients and suppliers.

Additionally, business accounts tend to come with sophisticated management packages. For example, the right account could allow you to produce automatic invoices and receipts and flag up missed or pending payments.   

• Multiple cards

You can apply for more than one debit card for your staff members to use for purchases.

• Building a strong credit score

If you plan to expand your business, you may need to arrange finance at some point, such as a business loan. Getting credit is easier if you have a healthy business credit rating, which a business bank account can help you achieve.

• Protecting your personal credit score

Conversely, if it all goes wrong, and your business struggles, any fallouts, such as County Court Judgments (CCJs) or missed loan repayments, would appear on your business credit report rather than your personal one.

What are the disadvantages of a business bank account?

Unfortunately, there are some disadvantages associated with business bank accounts that you should consider before opening one. These include:

• Product fees

Many business bank accounts come with fees and charges. For example, you could pay up to £25 a month to use the account. Other common charges include fees levied on money transfers, currency conversions, debit card purchases and paying in cheques at the Post Office 

Business bank accounts also tend to pay lower interest rates than personal bank accounts. This reflects the greater range of business-related account services offered. 

• Potentially lengthy application process

Although applying for a business bank account is pretty straightforward, it can take several weeks before your account is activated and you’re issued a debit card. Delays can happen for several reasons, including if your business has partners who all need to be checked, a weak credit score or operates in a risky sector. 

You may also find that you can’t get the overdraft you expect if you don’t have a solid credit history.

• Managing two types of account

The main reason for having a business account is to separate personal and work transactions. But with two accounts come at least two debit cards, two sets of passwords and PINs and the need to cross-check two accounts to ensure you’re using the right one and haven’t confused them. All this adds to your administrative load and can be problematic if you accidentally use the wrong account. 

How do you choose a business bank account?

The benefits and perks that come with business accounts can make them worth investigating for all but the smallest of firms.  Here are some features of business accounts:

Access: Most businesses don’t have to visit their branch, meaning online banking is sufficient, but if you regularly take cash payments, you may want to pick a bank that has a branch close to your home or place of work 

Introductory offers: Some business bank accounts include introductory offers, such as no monthly fees for a limited period or competitive overdraft interest rates. It’s worth considering these options and switching to a better account when the deal expires 

Fees: Ensure you take time to compare accounts by the charges they impose. Although you might not plan to use the overdraft or pay in cash or cheques at the Post Office, for example, things change, and these fees may become relevant a few months or years down the line. Be prepared to switch accounts if you find certain fees cost you more than expected

How do you open a business bank account?

Opening a business bank account is similar to opening a personal account. There’s a form to complete, and you should pass on certain information, which typically comprises:

• Owner/partner proof of ID – such as a passport or driving licence

• Proof that you are a UK resident

• Owner/partner proof of address – such as utility bill, tax return

• Business name and address

• Business contact address

• Financial status – e.g. last year’s earnings

• Estimated annual turnover

• Companies House registration number for limited companies 

How long does it take to open a business bank account?

If you’re a sole trader or a small firm, your new business bank account could be up and running within minutes with fintech account providers such as ANNA Money or Tide Bank. With a high-street bank, your account might take five working days to set up. 

Certain businesses may have to wait longer, perhaps even for a few weeks, while their bank undertakes checks. This is more likely if your firm has a chequered past, operates in a riskier line of work, or has relocated to the UK. 

How do you switch business bank accounts? 

As your business grows, your requirements may change. For example, your first business bank account may have reflected your lack of a solid credit history, meaning many of the perks other accounts offered weren’t available to you. Or perhaps you’ve discovered that your bank is charging higher fees than the competition. Either way, if you’re dissatisfied with your account or the provider, switch accounts. 

The Current Account Switch Service covers 99% of UK business accounts and is designed to make moving your business to a new account hassle free. All you need to do is:

• Open your new account

• Pick a switch date

• Tell your new account provider that you want to switch 

• Give them your old account details, and they do the rest