Finding the right business bank account for your small business.
Stepping into the world of business banking can be confusing for new or small businesses. Find out how to choose the best small business bank account for your company with our guide.
What is a small business bank account?
A small business bank account is an account best suited for small or new businesses.
With a small business account, your business will be able to receive payments from customers, create a payroll to pay staff, set up direct debits and standing orders, and track your cash balance.
How do I set up a small business account?
To be eligible to open a small business account, you need to be over 18, be a permanent resident of the UK, and your business must be registered within the UK.
When you apply for any business bank account, you may need to provide some information and documentation about yourself and your business.
The information you’ll need to provide includes:
- Proof of identification for all company directors, such as a passport or driver’s licence
- Proof of your personal address, such as a bank statement or utility bill
- The address of your business
- The contact details of your business
In addition to this information to support your application for a business account, you’ll need to provide your expected annual turnover and disclose if you’ve ever been bankrupt or issued a County Court Judgement.
You can set up a small business account online or visit a high street bank branch to do so in person.
How do I choose the best small business account?
There are multiple different types of business bank accounts, all designed for varying sizes of businesses, offering various perks and features. The right kind of bank account for a large corporation may differ drastically from one that suits a small business.
When choosing a bank account for a small business, you’ll need to consider what features will benefit you the most and what you can afford to pay for the account. When choosing the best small business bank account to open for your small business, there are three main options:
1. Start-up business bank account
Start-up business bank accounts suit small businesses that have only recently been founded. Most providers of start-up business accounts will only offer them to your business if it’s been trading for less than a year.
These accounts offer all the typical business account features, although it’s unlikely to come with an overdraft.
2. Standard business bank account
Most small business bank accounts are typical business bank accounts repackaged to attract small businesses. Usually, there will be little or no difference in the features available, with the only exception being the limit on the amount of money you can have sitting in your account at one time.
You’ll need to compare each business account’s features and associated costs to find the one best suited to your business’s needs.
3. Merchant bank account
A merchant account gives your business the ability to accept card payments via contactless, chip and pin, and online.
If your small business offers services to the public, such as an eCommerce store or restaurant, having the ability to receive card payments is essential, meaning you’ll need a merchant bank account.
These accounts come with fees, and the provider will likely take a percentage of each card transaction as a fee on top.
Things to consider when opening a small business bank account
Minimum opening deposit – Some providers may require you to pay in a minimum amount when opening a business account. The amount varies between providers so depending on your financial position, the amount could be the deciding factor.
Monthly Fees – Most business bank accounts will charge a monthly fee to keep them open. To find the best account for your small business, look for accounts which charge the lowest fees or offer a fee-free period.
Features available to you – Some small business bank accounts offer additional features, such as an overdraft facility, integration with accounting software, invoice capabilities, and business management resources. You’ll need to consider what features will benefit your business because you’llsave money by choosing a business account that only offers the features you’ll actually use.
Any limits – Bank accounts offered to small businesses may have some limitations. A common one is transaction limits. A provider may limit the number of transactions a company can make before fees are applied. There may also be limits to the maximum amount these transactions can be. This can be a problem for small businesses that receive funds through multiple transactions, for example, an online retailer.
Can I use my personal account for business expenses?
If you’re a sole trader, freelancer, or in another position where you and the business are the same entity, it is possible to use your personal current account for business expenses.
Despite this, it’s recommended to have a distinct small business account to keep your personal and business finance separate. It can help you keep your finances organised and should make it a lot easier when filling out your tax return.
If you’re running a limited company, it’s a legal requirement that the business has a bank account. This is because when you register a limited company, it becomes its own separate entity.
Having a business bank account for your business ensures you’re not personally liable for the business’s credit or money.
Plus, some personal current accounts have it in their terms of service that they can’t be used for business purposes. If you’re found to have used a personal account for business, your bank account may be closed, which could damage your credit history, making it harder to be accepted for bank accounts and credit products in the future.
Are there any fees involved with small business accounts?
Most business bank accounts will charge fees, although you may be able to avoid them if you choose a business bank account designed for small businesses.
Some accounts may charge a monthly or annual fee to simply keep the account open. Some of these fees can be as much as £30 a month, although there are cheaper options, with some providers charging between £3-£6 a month.
The business accounts that charge higher monthly fees typically offer advanced features that may not benefit a small business. A typical perk of expensive business bank accounts is the ability to earn interest on your balance.
Although earning interest sounds beneficial, you’ll only gain if your business has large amounts of cash sitting in the bank account.
There are small business bank accounts that are free to keep open, meaning you won’t pay a monthly fee. However, these accounts often charge fees for certain transactions instead.
For example, a free small business account may charge fees for using a cashpoint or transferring money. It’s therefore important to compare the functionality of each account to find the best business bank account for a small business that best suits the way your company functions.
If you’re unlikely to need to withdraw cash, it may be beneficial to choose a free small business account with a withdrawal fee. Because you’re unlikely to use this function, it may save you money.
If your small business bank account has an overdraft facility, you may be charged a fee every day you use it, along with interest on your balance.
What are the pros and cons of small business accounts?
Having a business bank account for your small business comes with many benefits.
- Keeps your business funds separate from your personal accounts
- Allows your business to build a credit history, which is important when you start applying for loans or business credit cards
- Includes valuable perks such as invoicing and accounting features
- Ability to apply for an overdraft facility
- Can issue debit cards to your employees
- Earn interest (this may be subject to the amount and frequency you pay into the account)
Business bank accounts do have a few drawbacks, and small business owners will need to consider these cons when searching for the best bank account for them.
- Most business bank accounts will charge a monthly or annual fee to keep the account open
- There may be fees or charges for performing certain functions, such as transferring funds, withdrawing money from a cash point and using the account to pay for things abroad
- You may be limited to the number of transactions you can make each month before fees are applied
- Certain small business bank accounts will charge a fee for accepting card payments
Small business bank accounts FAQs
Can I open a small business bank account online?
You can apply for a small business bank account online by visiting the provider’s website directly or using their app.
When applying online, you’ll have to provide details about yourself and the business you want to open the bank account for. Opening a small business bank account online is generally faster than visiting a branch to apply in person.
Can I open a small business account with bad credit?
Small business bank accounts will usually not require a credit check, meaning you should be able to open an account if you or your business has a bad credit history.
However, if you’re applying for an account that includes an overdraft facility, you will have a credit check performed on your business.
This credit check will determine if you are eligible for an overdraft and may dictate what your overdraft fees are.
Do small business bank accounts offer FSCS protection?
FSCS protection means bank account users will be protected from losing their money if a bank was to go bust. FSCS protection covers any funds in your account up to £85,000, any money over this limit will be lost if a bank storing your business’s funds was to cease trading.
All bank accounts, both for businesses and individuals, offered by registered banks will have FSCS protection as standard.
Can I switch to a new small business account?
Switching to a new small business bank account is relatively straightforward. You can have multiple business bank accounts for a single business, so to open a new one you’ll just need to apply as you would for any other business account.
If you want to use your new business bank account for payroll or to transfer any direct debits and standing orders, your new bank should be able to help you do this.
The Current Account Switch Service will move everything from your old account to your new one within seven business days.