Understanding 5 Types of Bank Accounts for Small Businesses
Choosing and opening a new business bank account can be a difficult task. Many options are available to help small business owners manage their finances wisely. Each type of account serves a different purpose. This article explores the various bank account options accessible to businesses, highlighting their unique benefits and drawbacks so you can make the right choice.
What are Business Bank Accounts Used for?
The checking or savings account your banker opens for your side hustle, startup, or small business will be similar to the ones you use for your personal banking. The minimum balance requirements and transaction prices could be slightly higher. When you sign up, you will need to give the following:
An Employer Identification Number (EIN) or Social Security number (SSN)
Any business licenses
Depending on your business entity type, its bylaws, operating agreements, or articles of incorporation will apply.
The entry-level business checking and savings accounts in your consumer bank advertising are similar to regular ones. When your business expands, its needs will also change, so you might need to change your business account.
You may require corporate credit cards, credit lines, and purchase protection, which may also necessitate paying higher transaction fees to your bank. So, if you are considering getting those options, carry a larger minimum balance.
Types of Business Bank Accounts
Businesses can choose from various accounts and services banks offer, and that diversity has only grown with the emergence of e-commerce and online financial institutions. We can categorize business bank accounts into the following types:
1. Business Checking accounts
Business checking accounts are typically more expensive, have higher balance requirements, and may come with more restrictions than personal checking accounts, which are generally free or inexpensive.
However, the process of choosing a business checking account is similar to selecting a good personal checking account. You will have to consider:
The network of ATMs operated by the bank
Any ongoing promotions or benefits for small business owners
Whether they provide services like overdraft protection
Any monthly maintenance costs and transaction limits (similar to personal bank accounts, most small business bank accounts have a set amount of free monthly transactions)
Ensure your bank offers a robust mobile banking app (the same goes for internet banking). Also, understand any minimum account balance or initial deposit requirements (i.e., a minimum opening deposit).
Benefits
Financial separation doubles the benefits if your company is formed and has limited liability. Separating your personal and business assets safeguards them and reduces the possibility that a court or creditor may pursue them in case of a legal issue.
Not only are organization and financial separation benefits of creating a separate corporate checking account. Under the company's official name, you also prove to your stakeholders that you are committed to carrying on that business over the long run. It also facilitates the beginning of a distinct business credit score, which will be advantageous when you look out for creditors or investors.
Drawbacks
You could be better off waiting for your company to expand if it is still in its early stages, i.e., a side project making little revenue. Opening a business bank account takes time – time that you could use to focus on the direction of your business.
In the early going, it may be more economical to use a free checking account than a paid business checking account as long as you maintain a neat set of books that closely monitor your company's financials.
2. Business Savings Account
Businesses use savings accounts to hold and collect interest on any spare capital they might be holding onto, much as you might open a personal savings account to save away your extra income.
Benefits
Typically, savings accounts pay higher interest rates than checking accounts. If your company has excess capital, you might get a better return by opening a savings account.
Setting aside money to pay your quarterly anticipated taxes to the IRS could be a sensible use of a higher-interest savings account.
The Federal Deposit Insurance Corporation (FDIC), which secures your cash deposits in case of bank loss, also insures most business savings accounts. The National Credit Union Administration (NCUA) will guarantee your deposits if you open one with a credit union.
Drawbacks
Minimum balance requirements and withdrawal limits for business savings accounts are typically higher.
3. Business Money Market Account
Like savings accounts, money market accounts (not similar to money market funds) provide greater interest rates in return for specific limitations. These interest rates are determined by the money markets, which involve borrowers and lenders of short-term loans.
If you feel that storing your extra money in a company savings account isn't giving you enough return on your investment, consider opening a business money market account.
Benefits
Usually, it includes debit cards and check-writing rights, along with higher interest rates compared to savings accounts.
Drawbacks
Money market accounts are less flexible and come with more restrictions than standard business savings or high-interest checking accounts.
4. Business Certificate of Deposit Account
While locking in your money for a predetermined length (anything from a few months to a few years), certificates of deposit, or CDs, typically offer even higher interest rates than money market accounts.
Benefits
Locking up a portion of your extra money in a CD can yield higher interest than a savings or money market account if you know you won't need it for some time.
Drawbacks
While savings or money market accounts often allow some flexibility in withdrawals, certificate of deposit accounts frequently penalize account holders for withdrawing money too quickly.
5. Merchant Accounts
Merchant accounts let companies take credit and debit cards, along with other forms of payment. A merchant account is more of a stopover in the payment chain than a place to keep your money.
Suppose you intend to operate an online store or process payments using a physical card reader. In that case, you will need both a merchant or merchant services account and your standard business banking account.
Benefits
Through the growth of fintech and e-commerce, multiple options are now available for paying for products or services to meet the increased demands of customers. With more adaptable payment options, your business can have more income opportunities.
Merchant accounts connect a typical bank account with these new payment methods. You must have a merchant account to conduct business online or accept multiple payment methods.
Drawbacks
Most card and electronic transactions will cost you under a merchant account agreement. How much depends on your service provider and their fee schedule; some charge a flat price, some charge a percentage of the entire transaction, and others charge a combination. Your bank, customer's bank, and Visa and Mastercard will charge fees.
Creating a Business Bank Account - Closing Thoughts
The actual work now starts since you know the top small business bank accounts offered. In some capacity, all well-known banking institutions will offer business bank accounts, so it's important to research to ensure you're getting the best possible deal. Whatever choice you make, keep in mind that it must meet the particular requirements of your business.