Five mistakes to avoid when opening a business bank account

When setting up a business, one of the first tasks will be choosing a well-suited bank account. There are, however, some pitfalls to avoid. Here we will take a brief look at some of them.

1. Failing to separate business and personal accounts

It is vital to understand that you should separate your business and personal finances from the outset, even if you are a sole trader or freelancer. Firstly, you need to speak to your bank about what your business plans are. 

Remember that a personal account is for your use only. If you mix business income with personal income and outgoings, your bank may have an issue with fees and other administrative factors. Separate accounts are always a good idea, and clients will see you as more professional with a dedicated business account.

Tax authorities will also need to see how much money the business has generated to tax income accordingly. There are also tax advantages to running your own business, and you may pay less tax with the advice of an accountant. However, this may be offset by additional accounting costs if your accountant has to spend time separating business and personal transactions.

2. Missing documents required to open your business account

It is not difficult to open a business account in the UK, but the bank will require specific documentation. Many business owners fail to ensure they have documents ready and available before meeting with the bank. At the minimum businesses will need proof of identity for any named directors. 

Documents such as a passport or photo ID driving license are appropriate forms of identification. Banks will also request you for proof of address, showing utility bills or a statement from an existing bank account will suffice, as will a Council Tax bill.

As this is a company account and the firm may be a legal entity in its own right (other than for a sole trader), you must provide a business address. You will also need contact details such as a telephone number. For partnerships or limited companies, a registration number from Companies House is necessary. Some banks may require additional information on your personal financial situation.

3. Making assumptions based upon online-only account opening

Although you can search for a suitable bank online and an initial application can be processed in this manner, most major banks will require you to visit a convenient branch to finalise opening the account. Similarly, banks will expect someone to be physically present to sign the initial mandate. 

A good relationship with the banking institution can be beneficial to the future success of an enterprise. Most banks will offer the services of a business manager who will take an interest in your account and will be present to help you in the future. The sooner you establish a good relationship with the bank, the better.

It is vital to discuss charges applicable to the account and any possible free banking periods. A period free of fees can be invaluable in the early days as you strive to build revenue and will mean there are no unexpected charges on your account. Remember that charges can apply to all transactions on a business account, including paying in and outgoing payments.

Companies may decide to switch banks once the free banking period ends, allowing them to take advantage of a competitor’s offers. 

Always check whether your chosen bank requires a minimum balance in the account. By maintaining that balance, it may be easier in the future to arrange an overdraft or business loan as you will be demonstrating robust financial management in keeping an eye on your accounts.

4. Confusing credit cards and charge cards

Almost all business accounts will come with a debit card facility, but your bank may also offer a business credit card. One thing to check is whether this is a business charge card arrangement or a credit card which allows the company to make minimum payments on the monthly amount outstanding rather than settling the entire balance. Company cards, such as a charge card, is still valuable in that it will offer you credit for up to six weeks at which point the full amount must be settled.

Some business owners fail to understand the difference and soon have liquidity problems if using a charge card without understanding payment timings. 

5. Overly restrictive signing authorities

It is crucial to ensure that the bank has an appropriate list of individuals who are allowed to sign cheques and other authorities. This could be you alone, a designated person in accounts or perhaps two signatures for each transaction. The latter offers more security but comes at the expense of flexibility, requiring the availability of both signatories. 

Many new owners tend to be overly conservative in this area. Consider your availability and determine whether a second trusted party should have the authority to sign when you are unavailable. Most banks offer some form of option in determining a limit on the amount that can be signed off by a given signatory or combination thereof.

With so many features to think about and a wealth of banks competing for your business, setting up a new business account requires considerable thought. The above will help you to avoid some of the most common mistakes when opening a business bank account.

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