Looking to take your hobby and turn it into a small business? One of the benefits and necessities of owning a small business is opening up a separate business bank account. This week’s post outlines the 6 common pitfalls of setting up a business bank account and how to avoid them.
Don’t forget that any sale you make that is taxable should be collected and not spent – keep this in your account until taxes are due. If you need some help with sales and use tax check out this blog post.
Pitfall 1: Showing Up Unprepared
It’s not uncommon for small business owners to show up unprepared to open a business bank account. Your business must exist before a bank will set up a business account. This means there are a few steps that have to happen before you can open that account. You have to register your business and provide documentation before the bank is willing to open the account.
How to Show Up Prepared
Know What You Want to Open – Know what type of account or accounts you would like to open. I would recommend starting by opening a checking account first. Once your business brings in consistent revenue and has a cash reserve, there isn’t a need for a savings account. Also, there are fees associated with every account (more about that below) so if you want to keep your costs low, open the minimum amount of accounts you need.
Bring Proper Documents – To show up prepared to open an account, you need your Articles of Organization from the Secretary of State. This is the document that proves you are a registered business. The bank will also ask for your letter from the IRS (which lists your EIN number). You may also be asked for your tax identification. Have this with you just in case.
Cash on Hand – In addition to the necessary documents, be prepared to deposit money into your account. Bring cash or a check to make an initial deposit for accounts. There could be additional fees upfront costs. For example, I had to pay to become a member of the credit union I joined in order to open accounts.
Personal identification – A driver’s license or similar form of personal identification is needed to open an account.
Be prepared to answer the following questions:
- If you plan to use cash, ACH, or wiring with your business account
- Estimate the number of monthly deposits and withdraws to the account
- Estimate the amount of annual gross receipts
- How many years you have been in business
Pitfall #2 Assuming You Don’t Qualify
A big assumption regarding opening a business account is thinking that you need to have your business all figured out before heading to the bank. Believe it or not, your bank is not going to ask how you make money, what your year-1 goals are, or ask to see a business plan. Don’t let the assumption that you need to have all the answers or a well thought out plan prevent you from opening an account.
What Not to Bring
While business planning is important to organize and grow your business, you do not need a business plan to open a business bank account. This is a common misconception. As long as you have the documents mentioned above, you can open your business account.
Pitfall #3: Not Preparing for Additional Fees
A business account is different from personal banking and will most likely have service charges. This is normal and expected. Different banks and credit unions will charge different amounts for business account fees. This can cost anywhere between $5-$15 (or possibly higher) depending on the terms and conditions of your banking. You may also have two service costs if you have both a checking and savings for your business.
Financial Planning for the Costs
Shop around for banks or credit unions before you decide to open your account. Don’t always choose the cheapest option. This is a business-to-business relationship and think about what your business needs from the bank that’s handling your money.
Be sure to plan for the monthly costs into your business budget. If your monthly cost is $10, know that every year you will have to have $120 budgeted towards banking fees. This is the cost of being a business and should be anticipated every year of business.
I made the mistake of choosing to open a business account at the same bank where I held my personal accounts because it felt easy and familiar. I learned through many years of frustrating service, hours of phone tree systems, high fees, and fraud issues, that it wasn’t a great place to bank. It’s worth pulling your money and setting up new accounts elsewhere if you are not getting what you need from your bank.
Pitfall #4 Maintaining Minimums
Minimal balances are another area of financial planning that is easily forgotten. In addition to service costs, you will usually need to have a minimum balance. This minimum tends to be a higher amount than minimums subject to personal accounts.
Planning for Minimums
Some banks offer a reduction in service fees when you hit certain account thresholds. Meaning if you have a certain amount of cash in your account, the service charge is reduced. Ask your bank about the minimums cash requirements in your business account and spend some time planning and gathering the revenue you need so you have this base amount in your account.
Pitfall #5 Access to Digital Banking
Digital banking, mobile deposits, and account access may be necessary to have for your business. This may be the case if you frequently set up selling venues at art fairs and marketplaces. Some smaller banks or credit unions however may not have all the digital luxuries that larger banks have.
Asking the Right Questions
Ask before you decide to open an account if digital banking, digital deposits, and mobile account access is available online or through an app on your phone. You also will want to ask if the account is linkable to common payment providers and services you use such as Shopify, Square, Paypal, and more. These payment providers oftentimes link directly to your bank account to charge their fees or deposit revenue you have generated from sales.
Pitfall #6 Debit and Credit Access
While it may be pretty easy to open a business account, you will need to apply for a debit card and a credit card. These are not automatically given to you when you open a business checking or savings account.
Setting Up Business Debit and Credit Cards
Getting your banking cards set up will require some additional paperwork but can oftentimes be completed at the same time you open your business bank account. You will have to apply for a debit, credit card and ask for checks.
Checks are usually free (unless you want fancy designed ones) but you may have to ask for them when opening your accounts. Going with the free checks is a great way to keep business operating costs low.
Just because you can have a business credit card doesn’t mean you should. Think about the size and financial situation of your business. Using a credit card is borrowing money from your future business, that you will have to pay off.