Business bank account
Business bank account definition
A business bank account is a bank account for companies. It is opened in the name of a business, and it is used for business-related transactions rather than personal finances.
Operating a business entails managing a number of different types of transactions on a regular basis, including income, expenses and employee pay.
As a business owner, managing your company’s financial transactions will quickly become a problem if you rely on your personal bank account, explains Nancy Yang, Account Manager, Small Business at BDC.
Not only will having a personal account for business give you and your accountant a big headache during tax time, it will also reduce your company’s perceived legitimacy. It might even create legal problems further down the road.
For these reasons, and many more, it is essential for every business owner to open a dedicated bank account for their company.
What is a business bank account?
A business bank account is a bank account that you open in your company’s name and that you use exclusively to handle your business-related transactions.
This type of account handles bill payments, purchases and savings.
Unlike a personal account, a business bank account will have certain features and offer services tailored specifically to the needs of entrepreneurs.
A business bank account could also offer you the possibility of processing salary payments and receiving credit card payments. It could also provide an option for your employees to become secondary account holders and use a company debit card.
Why do you need a business bank account?
There are many reasons to open a business bank account in your company’s name. Here are four of the main ones:
1. It builds trust with clients, suppliers and employees
Having a bank account for your company sends the message to everyone with whom you are doing business, from clients and suppliers to investors and future partners—and even potentially your competitors—that you run a serious operation.
“Having a business bank account is just more professional. It will have a favourable impact on your image,” says Yang. “Imagine using your personal account and paying your employees and suppliers with personal cheques? They may wonder whether your company is legitimate.”
Having a business bank account will build trust in your company. In turn, this confidence will help you acquire customers and attract more business from existing clients.
To a lesser extent, opening a business bank account may also increase the legitimacy of your company in your own mind. Starting a business is difficult; opening a bank account for your company can represent a milestone that will help make your venture more concrete and tangible.
2. It maintains a wall between your personal and business transactions
Business owners often ask, “Can I use a personal bank account for my business?”
The answer is that, in Canada, the Canada Revenue Agency frowns upon the mixing of personal and business transactions. Especially if your company is incorporated. In that situation, all business-related transactions should be handled through a business bank account opened in your business’s name.
“Using your personal banking account for your business transactions, and vice-versa, can lead to many accounting and legal problems,” says Yang. “Avoid doing this.”
3. It simplifies your taxes
A business bank account will simplify your accountant’s work as well as yours, since it will not be necessary to sift and sort through every one of your transactions to determine which of them were personal and which were business-related.
“Having a bank account specifically for your business will help you remain organized throughout the year, which will greatly simplify tax reporting,” says Yang.
Having a separate account of business transactions may also save you money on bookkeeping and accounting.
4. It builds credit history
To operate and expand your activities, you will need things such as a business credit card, a line of credit and a business loan. But a bank will refuse your request if you do not have a business account. Bank accounts aside, the bank will likely refuse you a loan if your credit history has not been built up or is unsound.
“If you ask for a business credit card, your bank’s account manager will look at your transaction history,” says Yang. “If you wrote cheques with insufficient funds, or if you opened the account too recently, they may refuse your application.”
According to Yang, banks will typically wait three to six months before issuing you a credit card. This is done in order to verify that business activity is being conducted.
To ensure your future creditworthiness, it’s important to open your business bank account as soon as possible—and use it regularly and diligently to build up your credit score.
How to choose a business bank account?
There are many criteria to consider when deciding what bank is best for you.
Quality and history of relationship“If you walk in a bank with which you have no previous history and you open a business account, they may ask you dozens of questions,” says Yang. “But if you’ve had a long experience with them, it may be possible to have everything set up quickly, maybe even over the phone.”
If you’ve had a personal account at a bank for a long time, and you’re happy with it, put them on your short list. A business account will build on an existing foundation of trust. You might be able to leverage your good history to access certain services more easily.
In banking, relationships matter a lot.
How can a bank help your business
It’s important that your bank understand your needs, says Yang. “Do they have promotions that could be relevant for your type of business? Do they get in touch with you to see if they can help you with any challenges you may be dealing with?”
Specific business needs
Different banks may offer different services. Depending on your specific needs, one bank might be able to better serve you than another. Here are a few services and advantages that various banks offer:
- Wire transfers: Some banks offer online wire transfers, while others will require that you perform them in person.
- Transaction limits: Some businesses, like real estate brokers, will need to write and deposit cheques often. “In such cases, it will be important to inquire about daily, weekly and monthly transaction limits,” says Yang.
- Proximity: Certain types of businesses, like restaurants or small shops, need to make change and deposit money frequently, explains Yang. “In this case, you should probably choose a bank that has a branch close to your business.”
- Cheque deposit: Certain banks will rent you a cheque scanner. Your bookkeeper will then be able to deposit cheques from his or her desk. “It’s more efficient like this,” says Yang. “If this is important for you, remember to ask about it.”
- Fees: Banks charge a number of fees. Make sure to compare them when weighing your options.
Common business bank account fees
- Monthly: One of the most important fees to inquire about. Monthly fees are the amount that the bank will charge you every month for as long as your account is active.
- Cash deposit: Those are typically a percentage of the amount deposited beyond an agreed-upon monthly allowance.
- ATM: These are fees applied to ATM cash withdrawals.
- Transaction: These fees usually apply to every transaction over your monthly limit.
- Wire transfer: Some banks may charge a flat fee per transfer, but more commonly, fees are calculated as a percentage of the total amount transferred.
- Email transfer (or Interac e-Transfer): Depending on your plan, you may have a limited number of free email transfers, after which you will be charged a fee for each one.
Different types of business bank account products
Having a business bank account will give you access to different financial products and services.
- Chequing account: The business chequing account is the most basic type of business bank account. It’s used for everyday transactions.
- Savings account: This type of account can be useful to build an emergency fund.
- Credit and debit card: Each type of card will have its own fee structure. You may not need both.
- Line of credit: A short-term flexible loan, with a dollar ceiling, that a business can use as needed.
- Payroll services: Your bank may provide a service for streamlining and simplifying payroll processing.
If you don’t have a business bank account, you will not be able to have a business loan. A bank will never deposit a $500,000 business loan in your personal account.
Can I get a business loan without a business bank account?
Banks will not normally allow you to take a business loan if you have no business account.
Similarly, if you are looking to take advantage of government business support programs, you will also need a business bank account, since governments do not deposit that type of funding into personal accounts.
“During the COVID crisis, for example, if you wanted to get a government loan through the Canada Emergency Business Account program, or CEBA, you needed to have a business account, since they would not deposit the money in a personal account,” explains Yang.
Get insights into what lenders and banks look for when evaluating you for a business loan. Download the free guide, How to Get a Business Loan.