As your business starts out, it is important to establish business and financial practices that will help you save time and effort as your business grows. A key practice in this regard is opening a business bank account.
A business bank account manages your business finances, while a personal bank account is meant to be used for personal finances only.
In this article, we will be taking a look at the main differences between a business and a personal bank account, why you shouldn’t use a personal account for business, and 6 good reasons why you should open a business bank account.
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Differences between a Personal and Business Bank Account
The primary difference between a personal and business bank account is that a personal account is meant to be used only for personal use, while a business account is to be used for business transactions.
Furthermore, differences between personal and business bank accounts can also relate to:
1. Access to credit
Since they are aimed towards businesses, business bank accounts usually offer greater access to credit than personal bank accounts. If that’s not the case with your current banking arrangements, then see this article from Westpac re: Changing Banks For Your Business Banking.
2. User access
A personal bank account can be accessed only by its owner or someone who has Power of Attorney for the account. A business bank account, on the other hand, can be accessed by multiple employees with valid credentials.
3. Fees and interest rates
The fees that apply to personal bank accounts are fairly low. However, a business bank account has different fees and interest rates than personal bank accounts, which may be higher than those for personal accounts.
A business bank account requires significantly more paperwork and documentation — for instance, an employee identification number (EIN) and business license —- than a personal bank account.
5. Receiving payments
As opposed to personal bank accounts, business bank accounts offer merchant services, allowing you to receive credit and debit card payments.
Why Should You Not Use Your Personal Bank Account for Business?
Using your personal bank account for business presents several pitfalls. Firstly, it may convolute your financial tracking and make it difficult to separate personal and business transactions. This may cause problems when filing taxes.
Using your personal account for business can also make you look unprofessional and decrease consumer trust in your company.
Remember, having a business bank account will only make your life easier as a business owner, so don’t delay opening one up.
6 Reasons Why You Should Open a Business Bank Account
1. To present your business more professionally
Having a separate bank account for your business assures customers, clients, vendors, and other parties that you are operating a legitimate business.
Clients may be reluctant to do business with a company that operates using a personal account as that may give the appearance that the business is a scam, is new, or the business owner simply did not make the effort to create a business account.
Furthermore, having a business account establishes a professional image with suppliers and vendors, which may have a positive impact on your business terms with them.
2. To simplify tax filing
Using a separate account for your business transactions makes it easier for your accountant and bookkeeper to find relevant information when filing tax returns.
If both your personal and business transactions were performed from your personal account, your accountant would have to sift through the transactions to identify business-related transactions, spending extra time and effort, which would add into the fees of filing the return.
It would also create more room for human error while filing for taxes if personal and business expenses and transactions were lumped together.
3. To build a credit profile
Building a healthy business credit profile is important when applying for business credit cards, loans, mortgages, and lines of credit in the name of the business.
If you are thinking about expanding your business, hiring more employees, renting a new space, or anything that may require a loan, building a credit profile is all the more important for you.
4. To make it easier to apply for a loan
In addition to helping you build a credit profile required for loans, having a business bank account makes it easier to complete the application process for a loan.
When you apply for a loan or government support, you will be expected to provide certain documentation usually including the last three transactions, cash flow statement, and profit and loss statement.
Having a business bank account is instrumental in acquiring these documents and, thus, meeting the requirements for a loan application.
5. To simplify expense and transaction tracking
Performing business and personal transactions all from one account can make it difficult to discern how much money is going towards each use.
It may make keeping track of expenses difficult if you have to sift through your monthly statements to determine which transactions are business-related.
6. To maintain clear records
To make sound business decisions, it is crucial to have a clear record of your business transactions. Having clear records makes it possible to figure out trends (for instance, the months with the highest and lowest sales), to have a certain idea of expenditures, and determine profits.
This information is important in making decisions to scale your business and make prudent decisions to improve it.