More than 82% of businesses fail because of poor cash flow management, according to a US Bank study. This includes mixing up personal and business income streams and getting late payments due to poor customer payment options.
In other words, if you choose the wrong business bank account option, you might make it harder for your customers to pay for products and eventually run out of cash. Unfortunately, these accounts are far from one-size-fits-all, and finding one that’s right for your business can be challenging.
Wondering what to do? Let’s take a look at the various types of business bank accounts and how to choose the right one for your needs.
What Is a Business Bank Account?
A business bank account is a central hub you use to manage money-related aspects of your business. Like a personal bank account, this account helps you deposit money using various methods, such as cash, checks, bank transfers, and card transactions.
Plus, you can use business bank accounts to easily set up credit payment systems or online payment gateways to process customer payments. But that’s not all.
Here are some other things you can do with a business bank account:
- Pay employees, suppliers, and vendors
- Pay taxes
- Receive investor funds and sales revenue
- Apply for grants and business loans
- Order office supplies and stock.
Do You Need a Business Bank Account?
If you’re operating as a limited partnership or a sole trader, opening a business bank account isn’t a legal requirement.
However, any accountant worth their salt will ask you to open one. That’s because a business account can separate your personal and business finances, simplifying bookkeeping and tax reporting.
If you are looking to open a business bank account in Australia, then see Westpac’s article for more information.
Types of Business Bank Accounts
When it comes to managing your hard-earned cash, you should use more than just a regular bank account. Let’s look at common types of business bank accounts:
1. Business Checking Account
A business checking account has the fewest restrictions, gives you various ways to withdraw funds, and provides several options for adding money to your checking account, such as wire transfers, mobile check deposits, and electronic transfers.
These accounts also integrate with accounting or financial software, helping you manage employee payouts and business transactions in one place.
However, unlike personal checking accounts, several business banking accounts have a monthly transaction limit. Going over this limit can lead to per-transaction fees (usually 1% to 5% of the total amount).
2. Business Savings Account
A business savings account saves profits you don’t plan to spend in the next two or three years. These accounts help you earn interest on your savings but come with limited access. For instance, you are only allowed up to six fee-free withdrawals per month under federal law.
Also, you might not be able to use an ATM to withdraw cash or write checks. Plus, many banks place restrictions on the number of deposits you can make to your business savings account within a given month.
3. Business Certificate of Deposit (CD) Account
Business certificate of deposit (CD) accounts are an excellent option for stashing your savings or rainy-day funds because they offer high-interest rates. They have CD terms lasting anywhere from a few months to six years, with long-term deposits having a higher annual percentage yield (APY).
While you aren’t prohibited from taking money out of your CD account, you’ll have to pay a steep fine — usually several months’ worth of interest — if you do so before your term is up. And the earlier you take the money out, the higher the penalty will be.
4. Business Money Market Accounts (MMAs)
Business money market accounts are a blend of business checking and saving accounts. According to federal law, they’re limited to six free withdrawals per month and come with higher APYs than business savings accounts.
MMAs offer various payment processing methods, such as direct cash withdrawals, credit card usage, and check-writing. However, they have higher minimum deposit requirements than business savings accounts, and some business owners may not meet these limits.
5. Merchant Account
Merchant accounts are used by small businesses to accept credit and debit payments. Here’s how they work:
- A customer pays you for a product or service.
- The money goes into your merchant account.
- Your bank charges a per-transaction fee.
- The money gets transferred to your other business accounts within 24 to 48 hours.
You can open a merchant account by signing a contract that typically lasts three years. However, since merchant accounts come with hefty fees, it’s best to be eagle-eyed when putting your pen to paper.
What Do You Need to Open a Business Bank Account?
Here are some documents you’ll need to open a bank account:
- Employer Identification Number – It’s a nine-digit identification number the IRS assigns to businesses for tax purposes. If you don’t have one, you can get one for free by filling out an application on the IRS’s website.
- Personal Identification – Banks need to verify who you say you are, and they do it through your Social Security number (SSN), passport, or driver’s license.
- Business Documents – When you sign up for a business account, you’ll need copies of your business formation documents. They provide information about your company’s management structure, accounting, and operation.
- Business License – It’s a document that provides proof that your business has the appropriate licenses to open a bank account.
- Ownership Agreement – If you’re part of an LLC or LLP, you’ll have to enter an operating or partnership agreement. This explains the rights and responsibilities of each owner and how the business will function, helping banks understand your business structure.
The Bottom Line
Most businesses will find themselves needing at least one business account. In fact, many end up requiring multiple. So, taking a moment to consider your goals and needs is crucial before opening a business bank account.
For instance, if you’re looking for a temporary place to hold your revenue and an easy way to pay your bills, a business checking account might be all you need. But if you’ve got extra earnings set aside for future use, a business savings account, CD account, or an MMA may be up your alley.
Once you know which accounts you need, start looking for business bank accounts with the best rates and appropriate fees. These don’t have to be at the same bank. You can use several to manage your money!
