It's not uncommon for sole proprietorships to co-mingle personal and business accounts. Many self-employed freelancers, tradespeople, or domestic workers may often find it easier for their clients to pay them via Venmo, or Zelle, for example — the same account they also use for buying their groceries, paying for a vacation, or giving a gift to a friend.
Any ideas of this being an "easy" time-saver go out the window when it comes time to handle typical small business events like paying quarterly or annual taxes, applying for a business loan, or getting to the root of an ongoing cashflow problem.
A little time, a large payoff
Though it will take only a few hours of time to open a new business account, notify your customers about it, and switch over any automatic payments or direct deposits, your business will benefit from this separation of home and work for the rest of its existence. Here's what you can do, using the power of well separated personal and business finances:
1. Create a solid business history.
If you go to bank or other lender for a loan and you have one combined account, how can its underwriters assess your firm's financial health with any accuracy if its income and expenses are buried along with your clothing and sporting goods purchases and that birthday check from Aunt Edna?
This matters when it comes time to apply for a business loan. You can't possibly be judged on your creditworthiness if you haven't created a place for solely business transactions.
2. Ease your tax management.
When your accountant asks you to itemize your travel and entertainment expenses, you'll know, without hesitation, which dinner was for meeting a new customer and which one was the mini family reunion. Firewalling expenses in this way can also mitigate the risk of being audited, since it shows that you've made a conscious judgment about the nature of your expenses.
3. Tell the IRS you're really a business.
In a related tax issue, there's the existential problem of "does the IRS even think I have a business at all?" It's not above some unethical taxpayers to cite a bundle of purchases, their cable bill, or a trip to New York as "business," even if the extent of their firm is a $100 payment they received for editing a neighbor's resume.
Most banks will require a "dealing in business as" or DBA, at the very least to open a business checking account. So having one is just another indicator that you have a business you take seriously.
4. Run accurate reports and analyses.
How much did you take in and spend last quarter? How much do you expect to make for the remainder of the year? It's impossible to detect patterns in your business revenue if customer payments can be confused with, for example the regular reimbursements you get form your homeowners association for buying supplies. You'll also save money on accounting and bookkeeper services if those pros don't have to spend time asking you "what was this for?"
5. Sharpen your professional profile.
It's simple: Taking the time to create a separate business identity and sharing that brand with your customers builds their confidence and establishes a proper relationship with boundaries. They're spending their money with a business that they can write a Yelp or Angi review about, recommend to their friends, or even complain about to the Better Business Bureau.
6. Minimize personal financial risk.
A separate business banking account buffers your personal finances from your business expenses. If a customer's check bounces, it won't affect your personal banking track record or your household finances.
7. Set yourself up for growth.
Setting up a separate account prepares you for future growth and prosperity. More transactions from multiple means of receiving payments call for a place of their own, otherwise they run the risk of interfering with your household bookkeeping.
Taking the time to set up a business banking account is a positive step for you and your business. You'll avoid costly legal and financial issues, reduce your anxiety, and free yourself to focus on being the boss and doing what you do best.
What to Look for in a Business Checking Account
A May 2023 Pew Research Center survey of the American workplace revealed that:
Relationship management. The best banks provide exclusive customer service phone lines and in-branch assistance for their business customers, including Relationship Managers who get to know you and your business.
Introductory offers. Look for no- or low-fee programs.
Interest rates. Are they competitive with other institutions?
Maintenance fees. How much do you need to maintain in the account to avoid monthly charges? Can your business afford it.
Tip: Banks typically encourage their personal-banking customers with businesses to keep their accounts under one roof. That said, check in with your current bank before checking out others. You'll have more leverage as a personal and business customer, if/when you have a problem.
Since 2008, Fora Financial has distributed $3 billion to 35,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.