What is a business account? Why your business needs one
Writer: Bertrand Theaud
Efficient management of business finances is a cornerstone of success, and business accounts are designed to fulfil this essential function.
While there’s no legal requirement to open a separate business account to run your business, you should not set aside this critical task.
This article will cover everything you need to know about business accounts, from their definition and types to benefits. We also guide you on how to select the right one for your business needs.
So, let’s dive in.
What is a business account?
A business account, also known as a business bank account or a corporate bank account, is a type of financial account set up specifically for business purposes. These accounts are typically opened in the name of a business at a bank or financial institution.
Business accounts help manage cash flow, track transactions, pay bills, and collect funds. In essence, they help companies keep their business finances separate and organised, distinct from their personal finances.
5 types of business accounts
There are 5 types of business accounts involved in the daily operations of a business.
1. Business checking account
Business checking accounts are the most fundamental type of business account used for daily transactions. It lets you deposit cash, withdraw funds, write checks, and make electronic payments.
Key features: Typically includes a debit card, online banking, mobile banking, and the ability to set up direct deposits and automatic payments.
Best for: All businesses, as business checking accounts useful for handling day-to-day financial operations.
2. Business savings account
Business savings accounts are designed to help businesses accumulate funds and earn interest over time. These accounts are an optimal choice for businesses aiming to set aside a portion of their earnings and grow their savings steadily. While they typically offer lower interest rates compared to other business investment accounts, their stability and reliability make them a valuable financial tool for long-term savings
Key features: Interest earnings, limited transaction capabilities than business checking accounts, and usually require minimum account balances to maintain the account.
Best for: Businesses looking to save for future expenses, emergencies, or investment opportunities.
3. Money market account
This type of account offers businesses a unique blend of features from savings accounts and checking accounts. They are interest-bearing accounts that typically provide higher interest rates compared to standard savings accounts, making them an attractive option for businesses looking to earn more from their deposits.
Key features: High-interest rates, check-writing and applicable debit card, high minimum account balance.
Best for: Businesses that have a surplus of cash seek to earn a higher return on their deposits while still having some access to their funds.
4. Merchant services account
A merchant services account is a financial tool to process card-based transactions easily. It is an essential asset for businesses that accept debit and credit payments, providing a hassle-free and efficient payment processing solution.
Key features: Ability to accept various forms of payment, including credit and debit cards and sometimes digital wallets such as PayPal and Apple Pay.
Best for: Online businesses and any other companies where card payment processing is a routine necessity.
5. Payroll account
A payroll account is a type of business account designed to manage and process employee payroll services. It serves as a channel through which businesses transfer funds from their primary checking account exclusively for employee salaries and payroll tax obligations. Separating accounts is essential for precise financial tracking and simplifies accounting and tax reporting.
Key features: Integration with Payroll Systems.
Best for: Businesses with employees.
Why does your business need a business account?
Whether you’re just starting a business or operating for years, a dedicated business account is essential for more than just convenience. It’s a key component for sustainable growth and effective financial management.
Here are the key reasons why your business should have a business account.
1. Professionalism and credibility
Operating with a business account enhances your professionalism in the eyes of clients and partners. It shows that you are serious about your business and provides a level of trust and credibility that personal accounts cannot.
2. Improved financial management
Business accounts allow for better organisation of finances. They help separate personal and business transactions, which is crucial for accurate bookkeeping and financial analysis. This separation simplifies the process of tracking expenses, managing budgets, and preparing financial statements.
3. Ease of tax preparation and compliance
With a business account, tax preparation becomes more straightforward. It simplifies the process of identifying deductible expenses and ensures compliance with tax regulations. This clear separation of funds can be a lifesaver during tax season and in the case of audits.
4. Access to business credit and loans
A business account is often a prerequisite for applying for business loans or credit lines. Lenders and investors typically look for clear financial records and a dedicated business account as a sign of a well-managed company.
5. Enhanced features and services
Business accounts often come with features and services tailored to business needs, such as higher transaction limits, merchant services, payroll management, and the ability to issue employee debit cards. These features can significantly streamline various business operations.
6. Scalability and flexibility
As your business grows, your financial needs will evolve. Business accounts are designed to scale with your business, offering more flexibility and options to accommodate growth compared to personal accounts.
How to choose the right business account
Selecting the right business account is a critical decision that can significantly impact your company’s financial health and operational efficiency. However, there’s no one-size-fits-all ‘best’ account; it’s about finding the one that fits your specific payment needs.
Here are some key considerations to help you select the right business account.
1. Identify your requirements
Start by determining what you need from a business account. Consider your transaction volume, the need for cross-border payments, and whether you require online or website integration like accounting or expense management software.
2. Eligibility criteria
Ensure your business is eligible for the account you’re considering. Check the terms and conditions for requirements related to company registration location, legal structure, and the nationality or residence of shareholders and directors.
3. Fees and charges
Look into account opening fees, monthly service fees, and transaction fees. These can vary significantly between traditional banks and modern alternatives such as virtual banks or neobanks.
4. Types of payments
Familiarise yourself with the payment types available for your business account, including local and international transactions.
Final note
A business account goes beyond mere cash management. It’s about building trust, ensuring effective financial management, and laying the groundwork for business expansion.
Understanding the different types of business accounts and choosing those that align with your specific needs is crucial. Often, you might find that having more than one account is necessary to meet all your business requirements. Ultimately, having multiple business accounts is a strategic asset for any business.
