Personal banking vs. business banking: Do you need separate bank accounts?

Compiling financial statements and tracking financial transactions is an important part of running a small business. You need that information to understand your business’s financial health and make smart business decisions.

Tracking business transactions is easier when you keep your personal and business finances in separate bank accounts. But it’s not just a recommendation. Depending on your business, you may be required to have separate accounts.

What’s the difference between personal and business bank accounts?

A business bank account helps small business owners hold and manage money made within a business. Personal bank accounts are not for business use. They help individuals hold and manage their personal funds. Your business may operate under a DBA (doing business as) name or as an LTD or a corporation. In those cases, you will need a business bank account that’s separate from your personal account.

A business bank account typically includes a business current account and a business savings account. A business current account allows you to write and deposit checks, transfer money electronically and use a business debit card. Common account and service fees include maintenance fees, transaction fees, ATM fees and deposit fees. Some banks may offer free small business current accounts for new businesses. However, free accounts may come with tighter restrictions. Weigh your options carefully and find a business current account that works for your business.

A business savings account helps you separate savings from working capital and earn interest on the funds you set aside. Some savings accounts may require a minimum deposit. Others come with balance requirements and monthly fees. Look for a business savings account with low fees.

Even if you have a perfectly good personal bank account, it’s important to open a dedicated bank account for your business. A dedicated business bank account helps safeguard your business funds by separating your personal finances. Separating your accounts allows you to monitor your business spending more easily and create realistic budgets. Additionally, separate accounts promote better bookkeeping habits that can help you organise your business finances. When the time is right, you can secure a business line of credit or business credit card through your bank account.

Can I use the same bank for my business account?

Yes. When choosing a bank for your business bank account, it’s recommended to start with the financial institutions you already know and like. If you have a personal bank account in good standing, you may get a better deal on a business bank account at the same bank.

Can I use my personal account for business expenses or my business account for personal expenses?

No, you should not use your personal bank account for business purposes. Nor should you use your business account for personal expenses. Separate your business and personal finances to avoid legal issues or problems with record keeping.

Does a limited company need a business bank account??

Yes. If you’re registered as an LTD or corporation, you’re required to have a separate bank account for business finances. You should open a bank account under your business name as soon as you start handling business transactions.

Do I need a business bank account as a sole trader?

You’re not required to have a separate business bank account as a sole trader, but separate accounts are still a good idea. A dedicated business account can help you separate business and personal expenses and manage your business finances more easily.

How much money do I need to make before I can open a business bank account?

You do not need to generate revenue to open a business bank account. But you might open a business bank account as soon as you start handling business transactions. Some accounts may have a minimum initial deposit to open the account and require you to maintain a minimum balance. So be sure to review the terms and account fees of the accounts you’re considering.

More ways to take your business finances to the next level

Opening a dedicated business bank account is a smart way to manage your business finances. A business bank account makes it easy to pull financial reports, prepare taxes and generate financial statements. These reports give you the information you need to assess your business’s financial health and make data-driven decisions. Here are five more ways to elevate how you manage your business finances.

1. Understand your financial priorities

Current and future small business owners agree that managing expenses, getting paid and setting prices should be top priorities, according to a 2020 QuickBooks survey. Focusing on these elements early on can set your business on the fast track to financial success. This track includes opening a business bank account, focusing on accurate invoicing and building a scalable pricing structure.

Additionally, the survey asked which financial systems new business owners should invest in first. Current small business owners recommend expense tracking and invoicing software. After all, 80% of small business owners feel stressed about cash flow, according to a 2019 QuickBooks survey. And more than half agree that not getting paid on time is their biggest cash flow pain point. Mitigate cash flow struggles with clear expense tracking and invoicing software that does the heavy lifting for you.

2. Set up financial and accounting systems properly

You’re most likely to need help setting up your financial systems correctly when you’re just starting out, according to the 2020 survey. And yet, 38% of prospective business owners say they intend to set up their own financial and accounting systems.

Correcting mistakes or fixing a broken financial system only gets harder down the road. So do your due diligence upfront. Open a business bank account, invest in accounting software and manage business expenses to put yourself on the right track.

3. Maintain accurate records

The next generation of small business owners is more focused on securing funding than previous generations, according to the 2020 survey. More than 1 in 3 of these new small business owners identified “securing funding” as a business priority.

Borrowers hoping to secure small business loans or grants typically need a strong credit score and high cash flow. In most cases, lenders will ask to see a borrower’s balance sheets, income statements, business bank statements and financial projections.

Without a strong accounting software, it may be more difficult to provide the necessary documents and secure funding. Remember, a dedicated business bank account, paired with accounting software, can make it easier to track business funds and generate accurate financial statements.

4. Get a handle on cash flow and plan ahead

Even profitable businesses can run into cash flow problems. More than three in five small businesses have experienced a cash flow issue at some point in their history, according to the 2019 survey. Many of them were not prepared to struggle with cash flow, and nearly half say the problems surprised them.

Fortunately, there are a few things you can do to manage cash flow effectively and plan ahead.

• Build a rainy-day fund. No matter what challenges your business encounters, a business savings account can help mitigate a negative cash flow. Three to six months’ worth of expenses can help you if your business falls behind.

• Make collecting receivables a priority. Encourage customers to pay invoices faster by offering early payment incentives to keep money flowing in.

• Keep tabs on cash flow. Track cash inflows and outflows consistently, and regularly generate cash flow projections to avoid unhappy surprises. Save cash flow spreadsheets to the cloud for easy access, or use professional accounting software.

5. Set healthy savings habits

A business savings account is a good idea for a number of reasons:

• You’ll be better prepared for emergencies or cash flow challenges

• You’ll earn interest on the funds you save

•  Your business can be healthier financially, which lenders may notice

But building a business savings of three to six months’ worth of expenses can be intimidating. Closely monitoring your business spending can help. When you can see where you spend every penny, you’re less likely to indulge in unhealthy spending. Do your bookkeeping weekly so that you always have the most up-to-date information about your finances. Finally, prioritise your savings before you deduct other expenses. Building a savings account takes time and budgeting, but you’ll be glad to have it.

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We hope you’ve found this article on business banking useful. QuickBooks is here to help you and your small business grow - check out our blog to learn even more about how you can help your business succeed.