Small Business Banking 101: Everything You Need to Know

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 everything you need to know to get started.

Why do I 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 needing to sort 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 having to worry 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 contained in one account can drastically simplify your tax filing. You'll know exactly where to go when you need to verify expenses and hunt for possible 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 that simplifies 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, so this can be a nice perk. Having centralized banking also makes it easy to show proof of financials when securing funding outside your bank.

• Protect your business legally. Operating a business comes with risks, and one that has to be considered is the potential for legal action to be taken against you. When your business and personal finances are mixed, a lawsuit against your business could potentially impact your assets. Separating these 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 end up having a larger 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.

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 seems to offer 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 that will have frequent withdrawals. While you’ll likely end up maintaining some level of consistent balance, it’s hard to know just how much, particularly when you’re first starting out. 

Some also require a minimum opening balance in order 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. Additionally, you don’t want to have to write a check every time you need to buy something. 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. 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 mobile 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. Connections to other services

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

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

Types of bank accounts

Numerous types of bank accounts are available, 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, you may want to 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 in itself.

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 it 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 have to 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.

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 sort of 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 is one that pays up to 20 times the national average interest rate of a standard savings account. The interest on these accounts could be 0.60% or higher.

• ACH: ACH stands for Automated Clearing House, and it’s 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 it comes to handling finances for freelancers, a bank account definitely 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. 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.

This material has been prepared for informational purposes only.