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Small Business Banking 101: What You Need to Know

Business BankingSeptember 09, 2023

People start businesses for many different reasons, but at the end of the day, the goal is usually to make money. Once you’ve done that, you need a place to keep it. That’s where your small business bank account comes in. 

Small business finances can be a complicated topic, however. There are multiple account types, fee structures, and acronyms to navigate. As a business owner, you’ve got enough on your plate already—banking shouldn’t complicate things! 

That’s why we’ve put together this comprehensive guide on small business finances. In it, you’ll find what you need to know to get started.

8 reasons you need a business bank account

A business checking account gives you a place to store cash so you can make purchases and pay your employees. It also helps keep your personal finances separated from your business. 

Additionally, with business banking, there are a number of major advantages beyond the basics:

  • Accurately track cash flow and expenses. A dedicated bank account for your business, where all your transactions occur, makes it much easier to keep track of cash flow. You can easily see deposits and withdrawals without sorting out personal transactions. This also makes it easier to plan major expenses.

  • Access your funds with a debit card. A business debit card is a fantastic way to handle simple, quick purchases without worrying about managing a credit card. This is especially true early in your business’s life, when you may not qualify for credit cards with great perks.

  • Simplify taxes. Having your business transactions in one account can drastically simplify your tax filing. You'll know exactly where to go when verifying expenses and hunting for possible tax deductions. There also won’t be any confusion about how much revenue your business brought in, because it’s all funneled through your bank account. Small business taxes can be tricky, so anything simplifying the process is huge.

  • Apply for loans. Some business banking solutions also offer other services, like loans. When you open an account, it makes the loan application process easier. Financing is often a sticking point for new businesses, which can be a nice perk. Centralized banking also makes it easy to show proof of financials when securing funding outside your bank.

  • Protect your business legally. Operating a business carries risks, including potential lawsuits against your company. If your business and personal finances mix, a lawsuit against your business could threaten your personal assets. Separating these finances offers an extra layer of protection. 

  • Keep your customer information secure. A proper banking system helps protect sensitive customer information. This is extremely important in today’s era of data breaches, cyberattacks, and scams. It helps build customer trust, which often translates into customer loyalty.

  • Make ACH payments. When a bank account is set up, you enable your business to make and receive automated clearing house (ACH) payments. This is a convenient, secure way for businesses to move money, and you almost certainly will want access to it at some point. 

  • Appear more professional to customers and other businesses. Image counts for a lot in business. This is especially true for smaller businesses and freelancers, where not everyone has taken the time to set up basic systems. Receiving an invoice with a business name and account number on it helps elevate your company above the competition and create trust among customers, vendors, and other businesses you work with.

Small business-specific bank accounts vs. "regular" accounts

Among the dozens of banks and small business finance company options, there are probably hundreds of different types of accounts to choose from. Some of these are geared specifically toward businesses, and some are more “generic.” Do you actually need a “business” account?

Technically, no. However, if you choose one of these, you're more likely to get perks for your business, like higher limits and different fee structures. These may seem small initially but can have a more significant impact as your business grows and scales. Every little bit helps, right?

More importantly, business-centric accounts are more likely to be familiar with freelancers, solopreneurs, and small business owners' unique needs. These roles come with challenges you won’t find anywhere else, and having representatives and customer service be familiar with those needs can make a huge difference.

Types of business bank accounts

There’s no shortage of bank account options available for you as a freelancer, from basic checking and savings to specialty options. Let’s look at some of the most common types.

Business Checking

The business checking account will be the workhorse of your small business finances. This is an account with check-writing capability and (usually) a linked debit card. You’ll usually have ready access to these accounts and can use them to take payments, pay for purchases, and cover expenses for your business.

Business Savings

As your business grows, consider opening a business savings account. This account doesn't have the same ready access as a checking account. Instead, it's meant to serve as a holding spot for the money you want to save for the future. Savings accounts often earn interest, which can help turn your business's money into an investment.

Money Market

Money Market accounts have features of both checking and savings accounts. They have higher interest rates than checking accounts, but the tradeoff is reduced access—typically check only. They also often require higher minimum balances. These are great for holding cash for a period of time while you prepare for a large purchase.

CDs

A Certificate of Deposit account is similar to a savings account but holds the money for a fixed period. This could be anywhere from a few months to several years. Typically, CDs earn higher interest than other account types, with the caveat that you must commit to keeping the funds there the entire length of the term—no more, no less. This is an excellent account option for saving for expenses with a planned date.

What should I look for when choosing the best small business bank account?

When it comes time to choose a bank account, the sheer volume of options can be overwhelming. Every bank and financial institution offers multiple accounts, each with different features and perks. Moreover, there's rarely clear guidance on which features are best for a small business.

To help out, let's explore some of the key business bank account features to look out for.

1. No fees.

Many accounts have monthly fees attached to them. These typically run in the $10.00-$15.00 per month range, depending on the bank and specific account.

Sometimes, these fees can be waived when you maintain a certain minimum balance. This can range from as little as $500.00 to as much as $5,000.00. 

Unfortunately, the times when you most need these fees waived—the early days of your business—are also the times when you’re least likely to have these funds consistently available.

2. No minimum balance

Many accounts require a minimum balance to avoid charges. In fact, many of the accounts that advertise "no fees" will happily charge you one if you dip below this minimum balance. 

This should be avoided, especially for checking accounts with frequent withdrawals. While you'll likely maintain some consistent balance, it's hard to know how much, particularly when you start and your income fluctuates

Some also require a minimum opening balance to start the account. This is less of a big deal, although it can also be tough to make this cutoff if you're self-funding.

3. Easy access

A bank account doesn’t do much good if you can’t access the funds in it. That means a debit card is essential. You should also consider whether cash withdrawals are important and if you mind paying a fee for them—this may influence your choices, as not every bank will have local ATM access. 

Finally, consider how you’ll interact with the bank itself. Do you need physical branches and in-person support, or is online only okay? If the latter, you have access to a number of unique options. Just make sure the website and mobile app are functional.

4. An easy-to-use, functional mobile app

Mobile access is more important than ever. Visiting bank branches is a thing of the past, as 78% of adults in the U.S. prefer to bank via a mobile app or website. You may need to check balances, transfer money, verify payments or purchases, or make a mobile deposit at any given time. Being able to do so quickly and easily is important.

That means that your bank should offer a solid online experience. It doesn’t necessarily need to look nice, although that’s always a plus. But it should be easy to navigate and simple to use, without needing to hunt for the option you need. 

5. Accepts cash, checks, and wires

Getting paid is vital to running your business as a small business owner. And you'll likely receive payments in various forms, like cash, checks, and wire transfers. You'll want to find a bank that can easily accept and process these payment types. Limited payment acceptance can create hassles with deposits, ultimately slowing down your cash flow.

6. Tools for better cash management

When your monthly income fluctuates, finding a bank that allows you to manage your funds is essential. Look for a business bank with features to help you better manage cash flow, such as virtual cards or ways to organize your money. 

Virtual cards allow you to create separate card numbers for different vendors or 1099 contractors to keep spending organized and secure. Separating funds within one primary account for specific purposes like payroll, taxes, or operating expenses makes it easy to allocate money and see exactly where you spend money. You'll gain more visibility and control over your business finances with the right cash management tools.

7. FDIC-insured

Keeping your funds in a peer-to-peer payment app like Venmo or CashApp may be tempting, but it's not the most secure. Instead, you'll want to opt for an FDIC-insured bank to protect your money. The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance, up to $250,000 per depositor per FDIC-insured bank. 

When a bank has FDIC insurance, it typically means that even if the institution faces financial difficulties, the government safeguards your funds up to that amount. This protection is especially crucial for self-employed individuals and freelancers who can't afford to roll the dice on their finances. Make sure to verify the FDIC insurance status of any bank you consider—this information should be easy to find on any financial institution's website.

8. Customer service

You'll inevitably have some questions or issues between depositing funds, transferring money, and other transactions. Many banks will have robust self-service help centers with frequently asked questions. Still, you'll want to find a bank with responsive customer service representatives that can quickly resolve any problems. Access to experts who care about your business makes a big difference. Look for a bank that provides multiple ways to contact customer support, such as phone, live chat, and email.

9. Connections to other services

When it comes to business tools, connectivity is the name of the game. Platforms and apps connect in exciting and innovative ways, and banking is no exception. Finances no longer exist in a vacuum. 

Whether it's invoices, bookkeeping, or an e-commerce platform, the apps you use to run your business should connect seamlessly to your financial systems.

Definitions for key banking terms

The financial world can be confusing. Let’s clear up some of the more common acronyms and terms you’ll see when learning about banking and finances.

  • Compound interest: Interest that applies both to the initial deposit and to any interest earned. For example, if you deposit $100.00 in an account that earns 5% compound interest each year, you’d earn 5% on $100.00 the first year, 5% on $105.00 the second year, 5% on $110.25 the third, and so on. 

  • CD: CD stands for Certificates of Deposit, and it’s a savings account that offers higher interest rates in exchange for requiring the money to remain in the account for a fixed term. 

  • Money Market: Money Market accounts are like a cross between a checking and savings account. They offer higher interest than typical checking accounts but often only have the check-writing ability rather than debit card access. They may also have higher minimum balance requirements.

  • High-Yield Savings Account: A high-yield account pays up to 20 times a standard savings account's national average interest rate. The interest on these accounts could be 0.60% or higher.

  • ACH: ACH stands for Automated Clearing House, a U.S.-based financial network used in electronic payments and transfers.

Frequently Asked Questions (FAQs) about banking for small business

Whether you have questions about managing finances for a small business or need to know how to manage finances as a freelancer, we’ve got you covered. Here are some of the top questions about small business banking.

Do I need a business bank account as a freelancer?

When handling finances for freelancers, a bank account helps. You don't strictly need one, but some of the best advice we can give freelancers is to separate personal and business finances. This can prevent major headaches at tax time.

Does my business need a savings account?

The short answer is, “maybe.” If you intend to hold any significant sum of money and have no plans to spend it (or know how far in the future you’ll spend it), a savings account can be a good idea. Whether you’re saving for quarterly taxes, a large purchase or building up an emergency fund, putting your money in a separate account so that it doesn't accidentally get spent is a good idea. These accounts can enable you to earn interest on the money in them, providing further revenue. However, they’re not universally needed like a business checking account.

Does a small business need a bank account?

Yes! You’ll need some type of bank account to make and receive payments. Many people use their personal accounts when just starting out—particularly solopreneurs and freelancers. However, we advise against that. 

Keeping a separate account for your business is the best way to keep track of small business finances. It helps avoid mixing personal and business, which can cause liability issues. And it drastically simplifies tax season

Have you Found your small business bank yet?

Whether you’re new to business or you’ve been in the game for years, it’s never a bad time to brush up on your finances. You should now have a much better understanding of small business banking, and hopefully some ideas for your own business. 

For a solution tailor-made for small businesses and freelancers, try Found. Our all-in-one banking system is smart, simple, and free to sign up.

The information on this website is not intended to provide, and should not be relied on, for tax advice.

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