Thinking about separating your company and personal bank account? It could be a legal need for limited companies and partnerships to own a business account. But as a sole trader or freelancer, is it worth the hassle and extra work, especially when many business account providers will charge you a certain fee for using one? If you are wondering and coming up with these same questions, read on to learn about the various advantages that come with owning a separate account for your company’s finances, no matter how you do business.
- Designed for Business use:
It might sound obvious, but business accounts are solely designed to be used by the company. While sole traders could potentially resort to a personal current account for managing business finances, this hinges on the account’s terms. Certain providers might prohibit using personal accounts for business purposes, necessitating a thorough review of terms and conditions beforehand.
Opting for a business account ensures its suitability for business operations. Nevertheless, it’s essential to recognize that some providers may impose restrictions on the sizes and types of businesses eligible to open an account, emphasizing the importance of checking the terms in advance.
- Easily Organize your Finances:
Maintaining a distinct business account aids in cash flow management and simplifies tax return preparation. Initially, opting for your personal account might seem convenient compared to opening a new business account, but it’s likely to pose long-term challenges.
Mixing business transactions with personal ones, such as grocery shopping or buying gifts, complicates tracking business finances and inflates the time required for tax return completion. Having a separate business account streamlines monitoring balances, tracking business income and expenses, and identifying outstanding payments.
- Special and Useful Features:
While personal accounts are tailored for individual purposes, they understandably lack the specialized features beneficial for businesses. With a business bank account, you get access to a range of add-ons that can help your business. While the specific advantages vary among providers, they may encompass:
- categorization of your spending
- integrated invoice tools
- ability to upload receipts
- account upgrades for when your business grows
- integration with accounting software
Keep in mind that numerous business accounts may incur fees, including monthly charges or fees for specific transaction types. Nonetheless, certain accounts may provide free business banking, either indefinitely or for a designated period. It’s essential to review the fee structures of different providers before initiating an account.
- Build your Business Credit Rating:
Having a business bank account can jumpstart the development of your business’ credit rating, which is crucial when seeking loans, credit cards, or other financial assistance. Even if you’re not currently planning to apply for finance, opening a business account sets the stage for building your business’s credit history. It’s vital to manage your account responsibly and avoid overdrawing to maintain a healthy credit score.
Keep in mind, as a sole trader, credit applications are tied to your credit score since you and your business are considered one entity. Similarly, if you’ve recently formed a limited company, lenders might still scrutinize your personal credit history due to the early stage of your business credit history.
- Thinking of Scaling Up?:
While your business may currently be small, you might not see the immediate need for a business bank account. However, as your business expands and handles more transactions over time, managing them through a personal account could become challenging. Establishing a separate business account sooner rather than later sets the groundwork for future growth. It simplifies the process of scaling up your business, eliminating the hassle of switching to a more suitable account during periods of significant change. Additionally, many business banking providers offer the option to upgrade your account, granting access to additional features like invoicing tools. This flexibility means your account can adapt to accommodate your business’s growth.
The Bottom Line:
Choosing between your personal and business bank accounts is a decision that needs careful consideration, especially for sole traders and freelancers. While it might initially seem like an unnecessary hassle, the numerous advantages of having a separate business account far outweigh the inconveniences. As your business grows, having a dedicated business account becomes increasingly essential, facilitating smoother scaling and providing access to additional resources and tools. Therefore, despite the potential fees associated with business banking, the long-term advantages make it a prudent investment in the success and stability of your business.
