Should I keep personal and business bank accounts separate?
• Having a separate account for your business is both commonplace and makes financial sense.
• If you are self-employed, you can choose whether to use your personal bank account or not.
• Limited companies should have a separate business bank account as they are a legal entity in their own right.
• While you might get free banking for a time, most business accounts will charge a fee.
• Despite this, keeping your personal finances apart from your business ones will make completing your tax returns easier to do.
If you have just started a business and are self-employed or a sole trader, you can choose between using your personal bank account or a business bank account to manage the finances of your business.
This guide focuses on the differences of using a business bank account rather than a personal account to manage your business finances, when you are self-employed or a sole trader.
No matter how small your business is you (or your accountant) will have to submit a yearly tax return to Her Majesty’s Revenue & Customs – or more commonly called HMRC.
If you are trying to figure out the split between your business and personal finances after any length of time, having a separate business account is likely to make it much easier to identify what income and expenditure relates to which side of your finances. It can be and enough trying to recollect every transaction from a week ago… now imagine trying to remember what a particular transaction relates to months later!
Take a look at our whole of market business bank accounts comparison charts to find an account that is suitable for your needs.
For most personal bank accounts, you’ll find that using it for business purposes is not permitted. Banks will say that that a business account has a different approach to risk, highlighting the fact that personal accounts do not approach banking in the same way. Consequently, if the bank discovers that you are in breach of your terms and conditions, they might choose to refuse your custom – forcing you to go elsewhere. And of course, there is the consideration of how being on a bank’s blacklist may affect your credit score – both personally and for your business.
Taking payment by card is something that is rapidly becoming the norm for even the smallest firms. With the increased popularity of cashless transactions and the use of the internet to make purchases, more and more people are moving away from traditional payment methods, including cash and cheques.
To be able to accept card payments, you may need to look into a merchant account or equivalent– this is not available under a personal account. You could choose your business banking provider for your merchant services or look for an alternative provider.
Merchant services are comprised of an agreement between the retailer (you), a bank and payment processor to settle debit and credit card transactions. In addition to this, if you intend to take payment over the internet then you will need an internet merchant account. This is a specific type of account that is used to hold funds from online payments.
The whole merchant services can be quite complicated and most smaller businesses might hesitate to take card payments due to the added level of complexity that these bring. However, it should be noted that PayPal offers alternative methods that might be a valid alternative.
Details of these alternative merchant services can be found at PayPal’s business hub.
Obtaining and keeping track of business credit – including loans and credit cards – becomes much simpler with a separate business bank account. In the first instance you may find it simpler and easier to do this through your existing business bank provider – having looked after your account for a length of time makes it easier for them to determine your income and outgoings when considering your application. Of course, you can also choose to go elsewhere for a loan or credit cards, but remember that any provider will want to see proper evidence of the financial health of your company – and presenting statements that are a mish-mash of personal and business transactions is likely to give a bad impression of the seriousness with which you take your business.
In addition, the blending of your personal and business finances will muddy the waters when it comes to obtaining a credit score – either for say, a personal credit card or a business loan. For this reason alone, it makes sense to keep your business and personal accounts as completely separate entities.
For many people, the first provider they will approach for a business loan will be their current business bank. This makes a great deal of sense, as being familiar with your account they will know your trading history. Of course, if you have been using your personal account for business purposes then this becomes immediately apparent – leading to an awkward conversation at a time when you want to make the best impression on a lender.
You can find more information about a range of business borrowing products, including loans and credit cards, on our business page.
Online banking is a benefit that many of us have come to take for granted. Being able to pay your bills, check your balance and transfer money outside of business hours with a smartphone (and anywhere you can get a signal) is a terrific advantage over the 9-to-5 branch-banking of yesteryear. However, with the ever-increasing growth of online financial transactions comes the risk of having your account hacked or compromised by cybercriminals.
Having just one account breached is bad enough, but if you have both your business and personal matters in a single account it can be a double disaster.
Make sure you shop around for the best deals on your new business bank account. Some providers can offer a very attractive suite of benefits, including free banking, accounting software or other useful extras. Take a look at our business banking comparison chart to start your search today.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.