Which Business Bank Account Is Right For You?
There are a lot of options on the market, which begs questions and can get you stuck in the limbo of indecision. Should you just open up an account where you keep your personal checking and savings accounts? Should you go with one of the digital banks you saw an ad for on Instagram last week? Not to worry — we’re going to break down the pros and cons of each, and walk you through how to decide.
Digital Branchless Banks vs. Traditional Brick and Mortar Banks
Introduction to Digital Banks
Let’s start by defining what a digital bank is. A digital bank, also called a branchless bank, is one that runs entirely online. It doesn’t have physical locations, and because of this, is often able to offer better Annual Percentage Yield (APY) rates, as well as lower account fees and minimum balances. Online banks are often very user friendly and straightforward to use. They are also just as secure and compliant with federal and state laws as traditional banks. While some online-only banks are officially chartered and FDIC insured, many branchless “banks” are not technically banks, but rather run and transact with some back end help from traditional banks that are. In these cases, they just provide all the front end services like the dashboard experience, customer service, and mobile app.
You may be asking, why go with a digital bank if they just run on regular banks? Well, branchless banks are usually cheaper, especially for new businesses and startups. Many of them offer perks like high APY and no monthly service fees, even for small accounts. Hatch, for example, offers up to 5% cash back rewards when you use their business debit card. They also often come with useful features. Though technically not a bank account, Brex (which is acceptable for most lenders) has robust expense management features. As for ATMs, branchless banks usually have large partner networks so you’re not left hanging in the event you need to make cash deposits or withdrawals.
Introduction to Traditional Banks
We’re defining “traditional banks” as brick and mortar ones with physical branch locations. These can range from big banks like Bank of America to local credit unions. Traditional banks usually offer more services than digital ones. For example, many have notary services, foreign currency exchange, safety deposit boxes for cash, gold, or other valuables, and branded checks in addition to the basics like being a member FDIC, accepting electronic deposits, and having ACH capabilities. They also tend to come with a small business banker who manages your account, and can give personal and customized advice. This can be especially valuable for larger enterprises, as your transactions will likely be more complex than a new business with less cash flow.
The main drawback to opening an account with a traditional bank is that they come with higher costs and lower APY. Business bank accounts at bigger banks usually have account balance minimums and come with monthly maintenance fees. Many younger businesses may be unable to meet account balance requirements. That said, traditional banks provide some of the lowest term loan interest rates. You may reap the benefits of establishing a relationship early on when you're ready to apply for credit. For their own clients, banks usually provide better conditions and fewer limitations.
Online Banks are Best for Low Fees and Basic Banking Functionality
- Your transactions are simple. If you’re mainly just taking payments for services rendered, then digital banking may be easier and a better fit than a traditional one. Digital companies with few complex transactions (such as blogs, creative agencies, and consulting services) may be better off with digital banking services. Also, if you mainly transact online, you may find that digital banking offers ease of use and extra features. Nicholas Martin of Pest Control Hacks said that as a blogger, he only has two income streams (an Amazon Associate account and PayPal) to receive and send payments to and from his partners. NorthOne easily integrates with both, so he doesn’t need a traditional bank.
- You can’t meet daily balance minimums and/or don’t want to pay fees. Most digital banks don’t have any minimums and come with less fees than traditional banks. This makes them ideal for young businesses who may not yet have a lot of income. Joe Whiteside, co-founder of Honey and Roses Coffee shared that they “exclusively use digital banking (Bank Novo) and are extremely happy with it.” He cited that they offer a free business checking account, without a minimum maintained deposit. For their self-financed small business, a minimum 5 figure daily balance was unrealistic and they couldn’t see the benefits of paying fees at a traditional bank.
Traditional Banks are Best for In-Person Banking, Growing Banking Solutions and Needs
- If you care about having a connection with your banker. For many small business owners, there is a lot of value in being able to call someone who knows your name and business, and who can answer your questions. This was especially crucial when the pandemic hit. Tom Conlon, Founder and CEO of North Street Creative, cites his personal relationship with his local bank (Bank Rhode Island) as the reason why he was able to get a much-needed PPP loan.
- Do you need customized solutions or is time often of the essence? Small businesses with more sophisticated demands such as real estate investing, or more complexity, like having multiple locations, will likely want to opt for larger banks. If you need to be able to rely on one business day wire services, cashier checks, and notary services, then online banking won’t be for you. For Lisa Flood, owner of Solmate Socks and Sunnyside Textiles, the value of having someone proactively communicate with her and strategize when certain loans would be appropriate, is invaluable. As someone with a complex setup (she lives in Oregon, but the businesses she owns are registered in Vermont and North Carolina), going with Bank of America (a national bank) and a dedicated advisor was the best move.
Another Option: Hybrid Approach
Many small businesses successfully adopt a hybrid strategy to combine the best of digital and traditional banking. For example, some keep a significant chunk of their cash in an online bank to reap the higher APY, and just enough to cover emergency expenses in their traditional bank account. Dan Belcher, CEO of Mortgage Relief, mentioned that though he likes using a digital bank, transactions with discrepancies take longer than usual. He also has to make emergency transactions from time to time, which he has to do with a traditional bank. Because of this, his banking needs pointed to having both.
Considering Ethics, Sustainability and Banking Locally
Many small business owners care that their banks align with their values. For some, a bank that gives back to the community is a key consideration. Often, local credit unions are best at this. Clare Mambwe, Founder of Zzabs, uses Summit Credit Union, which is local to her, because they work well with small businesses, give back profits to the community, and sponsor scholarships for students in the area.
When it comes to social responsibility, such as sustainable investment theses, big banks can venture into grey areas. Online banks often run on big bank infrastructure to handle transactions, and ultimately, using online banks still helps traditional banks make money. Because of this, if you want to know that your bank really works to give back, you’ll have to opt for a highly specialized or hyper-local one, for example, Spring Bank, which is a B-Corp. Going with Spring Bank was the best option for Samantha, Founder of Teddy Locks, because as a sustainable business she wanted to be sure her company was ethically aligned end to end.
How to Open a Business Bank Account
Now that we’ve gone over how to decide on which bank account to choose, you’ll need to decide which option meets your business needs, and take the necessary steps to opening one up. Every bank account is different, but there are documents that you typically need to open an account such as proof of identity and proof of address. It’s also important not to forget about your opening deposit! Pay attention to any minimum balances that your bank account of choice may require.
Once again, keep in mind that each bank account is different, and may require different documentation at account opening than the information listed below.
Required personal information
- Name, date of birth, and Social Security number
- Contact details and mailing address
- Percentage of ownership in your company
- A picture ID issued by the government, such as a driver's license or passport
- If your company has several owners, you'll need to submit personal information and identification for each one who owns 25% or more of the company
Required documentation and business details
- DBA (doing business as) or trade name (if applicable)
- Your business's address
- Employer identification number, or EIN. (Single-member LLCs and sole proprietorships may be permitted to utilize their Social Security numbers.)
- Type of entity and industry
Depending on the sort of business entity you have, you may additionally be requested to provide the following documentation:
- Sole proprietorships may require a certificate of business name registration and a business license
- Partnership documents include a partnership agreement, a business name registration certificate, a business license, and a state partnership certificate
- Articles of incorporation, LLC operating agreement, and business license are all required for a limited liability company (LLC)
Last Word on Business Bank Accounts for Small Business
Setting up a business bank account is the first step on the path to fully separating your business finances and laying the foundation to financially scale.
In addition to being a solid first move in the journey to build business credit and get funding, business bank accounts often have access to more features that you might not be able to get with just a personal account. With more and more digital challenger banks emerging, small business owners have an ever-increasing number of choices. Take advantage! You have more power than ever to choose the solutions that are best suited for your businesses.
Why You Need a Business Bank Account and How to Get One
Many small business owners put off opening a business bank account due to expense, hassle, or simply because they’re too busy trying to wear all the hats in their business. However, opening a business checking account should be one of your first steps when starting your business, ideally, as soon as your company receives an Internal Revenue Service employee identification number (EIN) and begins to collect or spend money.
A business checking account is essential for managing your finances, regardless of how big or small your company is. Even if you're only part-time in your venture, you will still need one. You can open a basic account relatively easily and there are even no-fee options available thanks to a growing online and mobile banking sector. Let’s get into some reasons why you should open a business bank account, the various accounts available on the market, and how to choose the right one for your business.
Do You Need a Business Bank Account Even if You’re Just Starting Out?
Short answer: Yes
Though personal checking or CashApp accounts are enough to get you through handling basic transactions, they can lead your business into a grey area and get it into some sticky situations. Plus, separating your personal and business finances come tax season can prove to be a chore if you have to separate everything out manually. In addition to this, lenders and credit card providers will not accept statements from personal bank accounts, Venmo, CashApp, PayPal, or anything other than a business bank account, when deciding whether to extend your business credit.
Small business checking accounts are created to suit the needs of new businesses and growing enterprises. Banking with a brick and mortar company, like Chase, can help establish a relationship with the financial institution, giving you access to a banker who can help you make financial decisions and push your funding applications through faster. Digital banks often come with useful features that go beyond being a store for your funds. For example, NorthOne provides an “envelope” feature that helps you set aside budget for expenses such as rent, and Hatch provides up to 5% rewards on business debit card purchases. These can help you manage your cash flow and grow your company.
Why You Need a Business Bank Account For Your Small Business
Keep your business and personal finances separate
A business bank account is important for managing your company's finances separately from your personal ones. With a business bank account, you’ll be able to keep all your business transactions in one place, making it easier to keep track of your cash flow and expenses. Making a habit of keeping your finances separate also can help you lay the foundation for building business credit (though do note that having a business bank account doesn’t in and of itself help you build credit history). If you work in your small business full time and are concerned about having to pay for your own rent or mortgage, groceries, and other expenses, then try paying yourself a salary into your personal bank account to keep things consistent and separated.
Lenders can only deposit funds into a business bank account
This is a big one. If you’re serious about scaling your business, then you’ll need to use other people’s money at some point to make those big leaps. It’s also possible that you could run into an emergency where taking out a loan is necessary to help you bridge cash flow gaps. When the time comes to submit your funding applications, lenders will typically need to see at least three months worth of bank statements from a business bank account.
This serves to check in on your cash flow and other financials, but it also allows lenders to verify your account. Lenders can only make deposits of funds into business accounts. Part of the reason why they ask for business bank account statements is that it serves as a safeguard — small business loans can only be used for business expenses, otherwise it’s considered fraud. The SBA’s Payment Protection Program (PPP) did allow deposits into personal accounts, but this was under the precedent of a global health crisis, and is not the norm.
A commercial banking connection could be advantageous in the future
This mainly applies to big banks such as Chase and Wells Fargo, though it also can hold true for local banks and credit unions. Opening up a business bank account can help your company establish a relationship with a bank, making it easier to get funding and access to specialized help. When it comes to finances, relationships are still everything — there is no typical financial profile, and therefore no typical financial solution, meaning that those customized solutions require one-on-one conversations. Not only that, but as you build a positive relationship with a bank as a responsible borrower and business owner, you can usually qualify for lower rates and better payback terms over time.
A small business bank account makes tax preparation easier
As a small business owner, you will get access to tax deductions that are not available to individual accounts. In order to file taxes and get those benefits, your accountant will need to see your business expenses.
If you’re a sole proprietor, you may know that you technically don’t need to have an EIN to operate your business, nor do you need to file personal and business taxes separately (instead, you report business income or losses on your personal tax return). Quickbooks Self Employed does allow you to hook up a personal bank account. From there, you mark each expense as personal or business. It’s not wrong to organize your finances this way, but it is a lot easier to have a separate business account. Plus, if you decide to scale your business and move beyond solopreneurship, then you will have to move your accounts.