Opening a bank account for your business is the first step in building and separating your business credit.
"It’s nearly impossible to scale a business using personal funds alone, getting started on this the right way is important. A business can use its credit to access 10 to 100 times more financing than an individual person can," says Levi King, CEO and co-founder of Creditera.
If you apply for business funding, lenders will want to see your business bank statements to see what your cash flow looks like, he adds.
Lenders will generally want to see a bank balance that is high enough to cover what would be your monthly loan payment. "If you have $5,000 in monthly payments and your balance routinely drops below $5,000, it can be a red flag," says Trevor Dryer, co-founder and CEO of Mirador Financial, a small business lending platform for banks.
There are several advantages to putting your company’s funds in its own account. For one thing it establishes credibility and clearly demonstrates that you’re serious about what you’re doing and your venture is no mere hobby.
"Your business seems more credible when the checks are written to suppliers and business partners form a business checking account versus a personal account," says Ravi Subbaraya, senior vice president and head of business banking product management for TD Bank.
A separate account is critical. "Creditors can levy personal bank accounts, but not a business bank account operating under a separate tax id, and vice versa. Having a business bank account is a component of asset protection," explains Tiffany Wright, author of The Funding Is Out There! Access the Cash You Need to Impact Your Business.
Know however, that once a business account is set up, personal funds can not be put in it. "If funds are commingled and a creditor can prove it, then the asset protection, and thus the benefits, will be stripped," warns Wright.
If you don’t segregate personal and business finances you could run into issues with the IRS if you’re audited, points out David Bakke, a financial columnist for MoneyCrashers.com.
Another benefit of a business account is the enhanced ability to track business transactions, income and expenses. You’ll have a good picture of how your business is performing. This information is also handy when tax filing time rolls around. "Having organized information can save you on tax preparation costs. Your accountant may charge you higher fees if they have to sort through your personal and business expenses to prepare your tax returns," says ReKeithen Miller, a certified financial planner with Palisades Hudson Financial Group.
Business accounts can have fewer fees than personal accounts and may include additional features such as credit card payment processing and payroll service (for a fee), says Bakke.
A business account in good standing will not affect your personal credit. However your personal credit score may be used in determining whether the bank approves you for a business bank account, adds Bakke.
Choose your bank with care
"Research who you want to work with. Don’t just go with the same place where you have a personal checking account," says King. He recommends finding a bank that’s helped your type of business in the past. Make sure they offer services that fit your business needs.
Bakke isn’t big on using an online bank for business purposes. "If you want to be able to speak with a real person about your company’s finances, you want to be with a local branch."
If you’re opening your business account as a sole proprietor using your social security number, the bank may check your personal credit score. A low score may prevent you from opening an account.
Plan ahead for check signing authority. Who will be allowed to act on the account, a partner or other staff? "It’s easier to plan this in advance, rather than going back to change it later. Be selective about who gets this authority. Employee fraud costs small businesses more than $20 billion a year," says King.
Know too, that a corporate resolution or articles of incorporation must be provided to open a business account under a different tax id, says Wright.
Review all fees and see how you can avoid them, such as maintaining a minimum account balance. Lastly, says Bakke, "Research the level of customer service before signing on the dotted line – it’s especially important for a business bank account."
Remember, your bank should be a partner.
Editor's Note: To find the best interest rates on business accounts, please refer to the following DepositAccount.com rate tables: business savings accounts, business money market accounts and business checking accounts.
Banks were not always allowed to pay interest on business checking accounts. As described in this DepositAccounts.com article, that changed in 2011.