Starting a new business is a challenge, to say the least. This is your dream, and you want to see it come to life—but there are a lot of things to think about, even before opening the doors (virtually or brick and mortar). Incorporation or sole-proprietorship? How to file taxes? Procuring inventory and scheduling workflow? Insurance? Then there’s the basic question of a bank account.
With everything vying for your attention, it’s reasonable that opening a business bank account can fall by the wayside. Many important considerations might be left behind in the fray that is opening a new business, which can be costly. In this article, we’ll help you determine the best bank account to open for your particular business needs.
How to choose the right bank account for your new business
There are many different types of bank accounts for businesses, each offering their own perks and are catered towards a different type of business. Some are focused on point of sales (POS) systems, some are better for large purchases, and some are geared towards saving a lump of capital for later expansion. The right bank account can help you with that. It’s just a matter of which one.
Why open a business bank account?
You may be asking why do you need a separate business bank account in the first place? It might seem reasonable for entrepreneurs to stick with their tried, tested, and true personal chequing account. But this will cause more problems than it’s worth.
There are multiple reasons why it’s a good idea for entrepreneurs to open a separate business bank account apart from their personal accounts. Identifying what your business finance needs are will help identify which bank account will work best for you.
When shopping for a business bank account, don’t forget that some banks will offer incentives. These incentives can pay off! For example, RBC offers a cash back incentive for Ownr clients who open a business bank account.
Taxes and audits
Taxes are not fun. Audits are worse. Not being organized can feel overwhelming. A separate bank account can solve many of those problems. Keeping your financial records organized with a business bank account can help tease apart what are personal finances and what are business finances. It allows you to reconcile all cash flow in a clear way through a statement of account.
Filing business taxes are different than personal taxes, and one slip-up could bring the Canada Revenue Agency (CRA) knocking. Entrepreneurs can write-off a portion of their expenses, particularly for those who work from home; business expenses can easily overlap with personal expenses. It’s easy to accidentally claim an expense as a business when, in fact, it’s a personal expense. This small mistake can be costly and is easy to make if personal and business finances aren’t kept exclusive. A separate business bank account can help with taxes and audits.
Opening a separate business bank account can be your best friend. That way, when tax time comes around, or the unfortunate event of an audit, you or your accountant won’t have a headache trying to sort out grocery shopping from inventory purchasing.
You have a business name other than your own
If you’re registering your business with the CRA, and your business has a name other than your legal name, you’ll need a separate business bank account. This is generally the case with an incorporated business. If you’re running a sole proprietorship, registration can be under your own name. However, even if just for the ease of taxes and expenses, having a business name and opening a bank account under that name will mitigate these complications.
Having a bank account that is under a business name other than your own also lends credibility to all partners and clients. It sends a message that you’re a real entrepreneur and puts potential clients’ minds at ease.
Required for business loans, credit, and grant applications
Having a separate bank account builds business credit, and in order to get a business loan, you need credit. Many start-up entrepreneurs need initial capital to cover costs such as inventory, leasing space, licenses, and so forth. When applying for a loan, the bank will want to see that you do have equity. A separate bank account helps with this.
A separate bank account also lends not just credit, but credibility. Business loans and grant applications require a business plan, a part of which is a financial plan. A financial plan is an overview of projected profit and loss (P & L), including all expenses. Keeping a separate bank account is the easiest way to stay organized and demonstrate a clear financial business plan.
Most business grant applications require a thorough business plan as well, and a separate bank account keeps all finances organized.
Needed for point of sale and payment transactions
According to the Bank of Canada, the volume of cash transactions Canadians perform has significantly decreased in the past ten years in both volume and value. In one out of three transactions, Canadians are now paying with debit or credit cards, or online through stores like Shopify and Etsy.
A business bank account is needed for POS systems like Moneris. A personal chequing account doesn’t allow this. Many digital POS systems come with added security features and can be used on-the-go through mobile devices. The good news is that many of the banks providing business banking services offer customer support to help you set up your new POS system.
10 things to consider when choosing a business bank account
Considering all the factors when you’re a new entrepreneur can be overwhelming, and it’s important to think hard about what you and your business need. Once you determine what activities your business will conduct on a regular basis, you can address which type of bank account is best for you.
1. Determine what type of bank account you need
Right out of the gate, choosing between a chequing or savings account helps narrow your focus. Services provided for financial activities, daily and long-term, are the primary difference between a chequing and savings account.
Don’t forget the bank’s incentives!
Chequing account
A chequing account is ideal for daily operations such as sales, bill payments, suppliers and staff payments, or other overhead costs. Chequing accounts are low-interest and can be viewed as the grunt-work account.
High-interest savings account
A high-interest savings account is generally used for higher interest savings and can be used if you have a lump sum of money to be used at a later date for expansion, updated equipment, and so forth. Instead of keeping that cash in a low-interest chequing account, moving it to a high-interest savings account can make your money work for you.
Savings account
A savings account can also be used as a place to allocate potential tax payments, so come tax time, payments to the CRA won’t be a shock. No one wants to be left scrambling to pay unforeseen taxes, which can cost dearly in overdue interest.
2. Understand the difference between chequing accounts vs. savings accounts
A chequing account is for daily use and yields very little interest. The primary uses of a chequing account include automatic machine banking (ABM) and debit card(s) transactions, teller transactions, and Interac e-transfers to pay suppliers, and other costs.
Many entrepreneurs need the ability to bank on-the-go, which is why they need online banking. Having access to their bank account via an app is essential, given the busyness of new entrepreneurs. A lot of banking apps also give entrepreneurs an overview of all their accounts and savings included, which can allow for ease of shuffling funds if the need arises.
Conversely, a high-interest savings account generally offers much higher interest than a chequing account. For this reason, savings accounts aren’t tailored for everyday use. Many savings accounts aren’t accessible via debit card and nor can bills be paid directly from them.
3. Amount and types of transactions
Different chequing accounts allow varying amounts of monthly transactions, whether it’s ABM, Interac e-transfers, or bill payments. Anticipating what your monthly transactions will look like will determine which chequing account will work for you. RBC, for example, has over 800 branches in Canada that are open longer, offering award-winning convenience.
Usually, the higher the number of monthly transactions included with the bank account, the higher the monthly fees. However, some bank accounts are now offering unlimited transactions, including e-transfers and bill payments, some of which have no monthly banking fees. Of course, there are pros and cons to these free bank accounts.
POS transactions will also determine what type of account would be best for you. A business bank account can help make these transactions seamless. It may also determine which POS system is right for your business.
4. Overdraft protection and overdraft interest rates
There’s nothing worse than non-sufficient funds fees (NSF). Maybe you’re waiting for a deposit to clear before a scheduled lease payment is withdrawn, and just missed the timing. Or you’re waiting for a shipment of products before you can invoice the client. It’s a balancing act and one that many new entrepreneurs face.
Having overdraft protection on your bank account is something to consider when choosing the right bank account for your business. When you build credit with the bank, this may be an option to look into.
Overdraft protection also comes with overdraft interest if not balanced. Choosing the right overdraft protection will also include a low overdraft interest rate and easy payment options such as online banking or through an app. Particularly for new entrepreneurs, balancing funds can be a challenge, and the last thing needed is paying high-interest rates on overdraft.
5. Night deposit box service
Depending on the bank, some business chequing accounts will offer an on-location 24/7 deposit box. If your business is performing cash transactions, such as a brick and mortar storefront, a deposit service is essential. In fact, it can also be a matter of security.
If your bank does offer this, there will be a round-the-clock deposit box that needs a key to access. Supplies to use this service will be included with the bank account, such as deposit slips and secure bags. However, some bank accounts will charge extra for this service, either on a per-use basis or included in the monthly fees.
6. International banking or online foreign currency access
As the world shrinks with immediate access via the internet, overseas business exchanges become more of the norm. This requires easy access to foreign currency.
Foreign currency transactions can be a challenge with some types of bank accounts, and exchange rates and fees vary. Some bank accounts are catered towards foreign currency transactions for a fairly low monthly fee and offer good exchange rates, which can be particularly useful for entrepreneurs who are partnered with international clients.
For some entrepreneurs, this bank account may need to be opened separately from their Canadian business bank account. Many banks offer both accounts and can be accessed online or with a mobile app. This makes keeping track of transactions easy. Some bank accounts will require a minimum balance in order to waive the fees, while some don’t but have higher exchange fees. It really depends on what your foreign currency business transactions are. An RBC USD business account helps you save money on foreign exchange while making and accepting payments in USD, something that’s very useful for ecommerce stores that accept payment from US customers.
7. Is your business incorporated?
This is the part where a lot of new entrepreneurs are challenged. Deciding whether to incorporate your business or register as a sole proprietorship really depends on your goals.
For an incorporated business, a separate business bank account is not just essential, but legally required. In the articles of incorporation (don’t worry, it’s not as complicated as it sounds), the business becomes a legal entity independent of the owner (i.e. you) and, as such, a separate business bank account is a necessary legality in order to keep the incorporated status, deposit money, pay taxes, and build credit and apply for loans.
A separate business bank account for an incorporated entity also allows a signing authority from more than one person.
As the articles of incorporation will name a separate entity other than your legal name, this must be reflected in the bank account, which further requires a separate business bank account. The articles of incorporation also legally require officer roles, including a President and Secretary. More than one individual will need access to the bank account if the business has multiple directors, and no one wants more than one person accessing a personal bank account. It’s just practical.
8. Weighing fees versus usage
After gathering all the information needed to make an informed decision, itemizing fees versus usage can help determine which bank account is best for you.
There are two general types of fees associated with a chequing account: Monthly flat fees and pay-per-use fees.
Monthly flat fees will vary depending on the perks included with the bank account, and how often and what types of services your business needs. Generally, the more you need to use your bank account, the higher the monthly fee. If you initially determine you need a bank account with very few free transactions, any transactions above the monthly allotted amount will be charged as separate fees. These are pay-per-use fees, and they can add up if not carefully monitored.
Bank accounts with a higher transaction allowance, or even unlimited allowance, will generally have a higher monthly fee. Weighing the cost analysis of a bank account with a higher monthly fee over the cost of potentially going over the monthly allotment is important in determining which bank account works best for you.
A lot of bank accounts that are “no-fee” are often affiliated with a larger bank and don’t have a brick and mortar branch. This could make some transactions a little challenging, depending on what your banking needs are (particularly for night deposit box service). However, all banks will have a customer service telephone number and online banking service that is accessible 24/7. RBC has business deposit accounts that offer unlimited electronic debits and credits and cheque deposits for as little as $5 per month.
Some business bank accounts will charge an opening fee, but if a minimum balance is deposited, or another bank account is opened in conjunction, banks will often waive that fee.
On a bright note, and something to take into serious consideration is the perks. Yes, perks! Banks want your business and are constantly offering different perks to get it. These perks could range from a dollar value deposited right into your bank account, to a points system to a new tablet.
9. Registering your business
When opening a new bank account, some banks or their affiliates will help you register your new business, which can take a lot of weight off your shoulders. They also offer perks when you register your new business with them in conjunction with opening a business bank account.
The bank you have an account with can also help take the burden off of incorporating your business, which is even more involved than registering as a sole proprietor. Rates for these services are usually significantly lower than hiring a lawyer.
10. Security
This may be last on the list, but it’s just as important. Inquiring about security against theft and fraud is an important part when choosing the right bank account.
A lot of banking is online, which means access to WiFi and mobile apps. Particularly when on-the-go, security is important to ensure the safety of not only your money but your identity.
Making the final decisions
Choosing the right bank account for your new business can feel overwhelming. New entrepreneurs don’t know what options are available or what their particular business needs are when it comes to the choice of banks and services.
There are a lot of factors to consider when choosing the right bank account. From determining your daily banking needs, customer purchase trends, overdraft protection and banking security, there’s a lot to cover.
Setting up your business bank account opens possibilities for your business to grow. Check out RBC’s offer in partnership with Ownr to learn more.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.