It might surprise you that small businesses account for 99.9% of all American companies. In 2018, 30.2 million small businesses were operating in the country, according to the US Small Business Administration. How are small businesses classified? Any company employing less than 500 people qualifies as a small business. Many business owners understand how important it is to have a business checking account that is independent of their personal one. However, there’s still a staggering number of small business owners that don’t have a separate business bank account.
There are currently 4,630 commercial banks that hold the Member FDIC label, which means you’ve got plenty to choose from. This article will help you weigh the pros and cons of some of these financial institutions and find the best small business checking account for your needs.
You’ll learn why it’s crucial to keep your personal account separate from your business operations. You’ll become better acquainted with the different types of accounts and the requirements for opening a business account. We’ll also look at the various fees banks might charge and factors to look for while researching the best business bank accounts. There’s also a list of checking accounts and their main features to help you start your search.
Why a Separate Checking Account is Important for Your Business
If you work for yourself or are launching a small business, you might be tempted to use your personal bank account for receiving or making payments. However, there are several reasons why you should set up a current business account for your banking services.
Depending on the activity type, a small business owner or a self-employed person has to pay business taxes. An individual business checking account allows you to track work-related income and expenses more easily. Working out how much to pay is a challenge if your personal income and expenditures are mixed up with your business in one checking account.
Keeping all transactions in the same checking account has two main disadvantages. First, it takes time to differentiate which card payments are strictly business-related and which are personal. Second, the IRS might refuse to deduct business expenses if you paid for them with business income from your personal account, even if they are legitimate.
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Starting a small business is an exciting but overwhelming experience. In the beginning, you might think that setting up a separate checking account is unnecessary and expensive. In the eyes of your customers, however, a business account brings credibility to an enterprise. The same goes for partners and suppliers.
A sound financial footing also helps build beneficial relationships within the banking sector. For a credit lender, a long-lasting checking account with a stable cash flow history says more about your business than any innovative presentation you create.
As a small business owner, you’re personally liable when it comes to legal issues. What is more, any cars or real estate you own could be in danger if you end up in debt. Protecting yourself and your personal assets from liability can bring you one step closer to a small business checking account. If your assets are adequately protected, any disputes over business issues will affect only the assets invested in the enterprise. Protection is crucial if you share a house, a car, or any joint-assets with a spouse or partner. You don’t want to risk their financial well-being because of a business mistake.
Business Bank Account Types
Banks offer three types of company business accounts: checking accounts, savings accounts, and certificates of deposit (CD).
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Business Checking Account
A checking account is a must for every business. This account is designed to facilitate everyday transactions and comes with a debit card, ATM withdrawals, and cash deposit services. The main characteristics of a checking account include a maintenance fee, required opening deposit, minimum balance, and transaction fees.
Business Savings Account
If your small business has accumulated some liquid assets, you might want your money to accrue interest, as well. A business savings account allows you to keep your cash safe while also earning interest. Thus, you have money to invest in expensive purchases. You can also use it as a financial cushion in case of future crises. Keep in mind that most banks require a minimum deposit amount to open a savings account.
Business Certificate of Deposit (CD)
A Certificate of Deposit is one investment that comes with little to no risk. You set aside money for a fixed period, and it accrues a fixed amount of interest. It’s a guaranteed return, though not as profitable as buying stocks, for example. There is also a penalty fee if you withdraw your cash before the period is over.
What Do You Need to Open a Business Account?
Each bank requires different documentation. Moreover, state regulations affect the list of certificates, paper forms, and records needed for opening a business bank account. When it comes to personal documents, you’re likely to need to show them proof of your identity, such as a valid ID, passport, or driver’s license.
You’ll also need to provide documentation to prove the existence of your business. Generally, banks ask for some or all of the following:
- Proof of address – several letters addressed to your business
- Your business license
- Documents verifying the legal incorporation of your business. Examples include: Certificate of Formation or Articles of Organization for LLC (Limited Liability Corporations), Partnership Agreement for General and Limited Partnerships, or Certificate of Incorporation or Article of Incorporation for Corporations
- Federal Tax Identification Number, also known as EIN (Employer Identification Number). Your EIN serves as business entity identification proof. You can obtain it from the Internal Revenue Service.
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Fees Payable with a Business Checking Account
Most banks advertise their business accounts as free; however, it usually means there are strings attached. Aside from the notorious monthly service fee, banks charge for almost any transaction you make. Even if they don’t apply a fee, there are often limits to specific actions. If you go above the threshold or fail to reach the minimum required balance, you have to pay. Here are some of the fees to watch out for when researching the various financial institutions for checking options.
Monthly Service Fee
You pay a monthly fee to the bank for providing services to your checking account. The amount depends on the type of account and your business needs. It can vary from a couple of dollars to a hundred or more. Most banks waive the fee if you manage to maintain an average monthly or daily balance. Online banks don’t usually charge a monthly fee at all.
Excess Transaction Fee
Each checking account comes with a certain number of transactions for free. Banks consider each cash withdrawal and deposit, as well as every check written, as a single transaction. Moreover, some institutions count electronic payments within the free transaction limit. You pay for any transaction above the limit. The fee can be as little as $0.10 or as much as $0.50.
Excess Cash Handling Fee
Similar to the number of transactions, banks limit the amount of monthly cash you can deposit into your account. Beyond that, you have to pay a fee for every dollar you deposit. For example, the bank might charge you $3 for a $1,000 deposit.
ATM Withdrawal Fee
Usually, you can withdraw cash using your business debit card for free as long as you use an ATM within your bank’s network. However, withdrawing money from an ATM that belongs to another financial institution costs a fee. If you often need to withdraw cash, the ATM network is a massive factor in your choice of checking account. You should also consider banks that don’t charge a fee for ATM withdrawals. Some online banks, for example.
Wire Transfer Fee
Electronic transfers of money from one account to another, commonly known as wire transfers, can be domestic or international. Banks usually charge a higher fee for international wire transfers. If you’re a developing global business, check the cost for international payments specifically.
Factors to Consider When Choosing a Business Account
There’s no single best business bank account. However, some accounts serve your business needs better than others. If you have a digitally-based enterprise, you need an account with reliable online banking. If you plan to expand soon, you should look to open an account with one of the top small business lenders. Or maybe what you need the most is a business credit card so you can collect rewards.
Knowing what your business needs now and in the near future defines the account you should open. Below are some factors and questions to help you determine what you need. Since your first business account is probably going to be a checking account, those are what we’ll focus on.
Don’t be afraid to expand the list of questions, since every business is unique. Your driving forces are also exclusive to you and your business. The following suggestions make a good foundation when you are researching banks, credit unions, and other institutions.
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How Big of an Opening Deposit Can You Afford?
Banks offer various checking account products fitting the needs of businesses ranging from start-ups to established enterprises. Therefore, the minimum opening deposit differs from product to product. Most banks offer their customers the option of opening an account with a deposit of less than $100.
If you have more cash to spare, you can open an account that accrues interest as well. A higher deposit often means fewer or lower fees. Commonly, banks reward you for depositing more by offering additional products from their portfolios, such as credit cards or business loans.
What About Monthly Fees?
You might have already noticed how quickly the odd, little fees here and there end up adding up. These are costs a launching business can’t afford. If you’re starting up, you should explore accounts with lower or no monthly service fees. Another option is to consider banks that waive the fee if you meet specific criteria. A minimum balance or owning a credit card with the same institution are some of the standard requirements. If you think your business can handle it, waiving a monthly fee of $10 saves you $120 a year.
Most traditional banks require you to maintain a minimum daily or monthly balance in your checking account. If you can’t, you have to pay a fee. On the flip side, online banks don’t have such strict rules and offer products with no minimum balance requirement. Such an option might be better suited for somebody who works from home that has to deal with the fluctuating rhythm of busy and slow periods.
How is a monthly balance calculated? First, add together each end-of-the-day closing balance throughout the month. Then you divide the sum by the number of days in the respective month. The result is your average monthly balance. If the bank uses the term average daily balance, they calculate the figure using the number of days in the billing cycle. A billing cycle is usually shorter than a month.
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Number of Transactions
Think about how many transactions your business handles per month. A freelance designer that receives payments for several projects per month won’t need a high number of transactions. On the other hand, a cafe on a busy street corner with credit card paying customers is going to need an account with as many free transactions as possible.
Cash Handling Business vs. Digital Operations
If you travel a lot for business, and you need easy access to cash wherever you are, you should look for a bank with an extensive ATM network. If your business handles a lot of cash, you should look for the highest limit for free cash deposits. On the other hand, a company that primarily functions online with limited cash flow is better off with an online bank account.
What About Your Personal Bank?
If you are satisfied with the checking account rates and service at the bank that handles your personal finances, why not also explore their business offers? As an established client, you might receive an offer that isn’t open to new clients. Moreover, banks allow online and mobile banking solutions to manage both personal and business finances in one place, which is an attractive feature.
What Kind of Support Do You Require?
If your business operates during unusual hours and you need 24/7 online support, you should check out online bank offers. Larger brick-and-mortar banks also provide quality customer support, along with online and mobile banking options. Another advantage of national financial institutions is the size of their branch and ATM networks. The downside is their lack of personal relationships with customers.
If you run a locally based business and need a partner that understands each stage of your entrepreneurial journey, you should look for a local bank or a credit union. The main benefit here is the personal relationship you can develop. Smaller institutions work hard to retain each of their clients.
Integration with Online Services
Managing your own business is a complicated and time-consuming activity. To help ease the pressure, it’s best to open a business bank account that easily integrates with your merchant services, payroll, and accounting system. Check carefully if the checking account integrates PayPal and Square payments, QuickBooks, and other systems that you might already be using.
Future Business Development
You’re choosing a bank account that responds to your current needs. However, you also have to think of what might happen in the long-term. The direction in which you want to develop your business defines what kind of services you need in a year, two years, or even further down the road. Moreover, keep an eye open if you’re looking to expand the portfolio of financial services used.
Credit approval might be easier if you’re already a client of an established SBA loan lender like Wells Fargo. Maybe what you need in the long term is a business credit card. A simple research of the best business credit cards will help you narrow down your choice of checking accounts.
Checking accounts aren’t famous for coming up with lucrative introductory offers. However, there are some exceptions. A bank might reward you with a sign-up bonus if you make a certain number of transactions and keep a minimum balance within the first couple of months. For example, PNC Checking Accounts reward you with a $200 sign-up bonus if you open an account before the end of the year.
Although some introductory offers might sound appealing, don’t make your decision based solely on them. Your business is a long-term initiative. Choose a promotional offer only if all other conditions are similar.
Business Checking Accounts Worth Exploring
Here is a list of checking accounts that you might find useful. Get to know the offers coming from the leading U.S. banks and a couple of online banks, and you’ll be in a better position to make an informed decision.
Offers from the Top American Banks
As one of the leading bank institutions in America, Chase has a desirable offer. The Total Business Checking Account offers a monthly fee of $15, which can be reduced to $12 if you enroll for paperless statements.
The bank waives the fee if you maintain a minimum daily balance of $1,500 in your account, or you already have a personal checking account with Chase. You can make up to 100 transactions for free with no limit on electronic deposits.
The cash deposit limit is $5,000 per statement cycle. Chase has a network of 16,000 ATMs and 5,000 branches in 26 states.
Wells Fargo Business Choice Checking has a $14 monthly fee. You pay no fee if you maintain a $7,500 average balance. The free transactions account limit is 200. After that, each transaction costs $0.50. You get to deposit up to $7,500 in cash per month for free. After that, the fee is $0.30 per $100 deposited. The offer includes mobile banking and a customer service phone center. The minimum opening deposit is $25. There are 5,600 physical branches and a network of 13,000 ATMs.
Bank of America
The Business Fundamentals Checking account has a monthly fee between $14 and $18, depending on your zip code. You can get the fee waived if you make purchases with Bank of America business debit or credit cards. Another way is to maintain a certain average or minimum balance in your account.
You get 200 free transactions, but every one after that costs $0.45. The free cash deposit offer is limited to $7,500, with a $3 per $1,000 fee for deposits after that.
Online banks usually come with no monthly fees, no minimum opening deposit, and no limit on free transactions. The drawback of online banking is that cash deposits, in most cases, need to happen through a traditional bank account. However, if your business is digital, it’s worth considering online bank offers.
The Business Account offered by nkbc is practically free. You only have to pay fees for sending domestic wire transfers ($5/wire) and for sending and receiving international ones ($45/wire). The bank offers appealing upgrades for your growing business, such as business savings and money market accounts.
Although the bank is online, you can withdraw money from 32,000 MoneyPass ATMs for free and get up to $12 refunded monthly for withdrawing from other ATMs.
Axos Business Interest Checking allows you to earn 0.80% APR if you maintain an average daily balance of $5,000. There is a $100 minimum opening deposit. The bad news is that the transaction limit is 50. After that, the fee is $0.50 per transaction. However, domestic ATM fee reimbursements are unlimited.
Other Online Banks
There are also attractive offers from online banks. For example, check out Azlo, another online bank with innovative options. BBVA Compass also backs it.
Revolut is a British online bank that is currently expanding into the US market. Its focus is on making international banking practically free.
All in All
Freelancers, local business owners, digital start-up entrepreneurs, and even non-profit organizations need a business bank account. It’s what fits your needs that differs. Continue with your research and choose the best product for you.
What are the most essential features for you and your business? We’d love to hear what you have to say. Take a moment to leave us a comment below!
Thanks for mentioning that small businesses have to pay taxes and having a separate business checking account lets you track business-related income and expenses. My brother is thinking about starting a business next month because he’s contemplating selling clothes from home that he makes. It seems like a good investment for him to hire a reputable service that allows him to have separate accounts if decides to start the company.
I’m in Ghana how can I open account and be one of your customer
I do not believe these offers are in Ghana.