A business bank account is one of the most important priorities for any small business, whether you’re operating as a sole trader or incorporating a company or partnership.
But all too often, new entrepreneurs don’t take the time to make sure the bank account they’re choosing is right for them, or that they’re getting the best deal. Indeed, many new business owners simply open an account with the bank they use for their personal banking - and, while that may be easy in the short term, it can come back to bite you further down the line.
There is now a wide variety of choice in the business banking market. The rise of ‘app-based banking’ is the most important recent trend, but the so-called ‘legacy’ banks may still be a solid option for many business types. It’s important that small business owners understand the business bank accounts on offer, and that they are confident that the option they choose is right for them.
Opening a business bank account
Opening a business bank account used to be a lengthy process involving reams of paperwork, business plans, credit histories, and more. That has now changed, and today it is possible to apply online for an account with most High Street banks – although this can still take between five and ten working days, especially if you don’t have an existing personal account with that institution.
With the emergence of the ‘challenger banks’ in recent years, most of which are operated through a smartphone app, it’s possible to open an account in as little as 5 minutes. This is because most of these app-based providers do not require a credit check to be performed.
Business bank account fees
In the UK we’re used to what is essentially free ‘unlimited’ personal banking - that is, we can generally conduct as many basic transactions as we like without incurring a fee.
Business banking is not free, however, and the cost of an account can vary significantly. Some providers offer a free banking period of between 3 and 24 months, during which some or all of their services are offered without charge. After this, though, the costs can add up.
The way in which fees are structured is different from bank to bank. Most banks charge a monthly account fee but you can find accounts with no monthly charge. Some banks charge for specific services; for example, some apply a cost for automated credit and debits, while at others these are free. It’s important that you consider how you anticipate using your banking service, and that you make a rough estimate of the charges as the total cost can be very different depending on the bank you choose and the way you use it.
It’s important to understand that not all accounts are protected by the Financial Services Compensation Scheme (FSCS). Under the FSCS, balances of up to £85,000 are protected in the event of the account provider going bankrupt. FSCS cover is standard on all accounts offered by full licensed banks. However, many of the newer app-based banking providers do not hold full banking licenses and, as such, do not come with FSCS protection. While these providers are required to hold client money in a segregated account with a fully licensed bank, your money is not protected should the licensed bank itself go under.
You should also make sure that you understand maximum transaction and balance limits, which apply to most banks. These limits can be quite low, especially at some of the new app-based banks, and if you exceed them then payments will generally be returned. It’s important that you check the limits before making a choice, remembering that what’s right for you now may not be sufficient as your business grows further down the line.
You should also think about the methods of payment you’re accepting. If you need to deposit cheques, a mobile-based bank is likely not for you as they generally do not accept them. Similarly, many of these banks do not offer overdrafts. If you are a business that requires these services then some of these accounts will not be suitable for you.
Finally, it’s important to understand your options for interacting with your bank. Most of the new app-based options only offer online ‘live chat’ services, and these can be unreliable. The legacy banks generally still offer telephone or in-branch support, but it’s worth checking both the cost to call the phone line and, of course, the location of your nearest branch - especially in the middle of the ongoing wave of branch closures.