New small business owners have many decisions to make when it comes to the finances of their company. One of the most important of these decisions is what type of bank account to use. There are a variety of account types — checking, savings, or investment — that yield different benefits and results. Here’s a breakdown of four different types of business bank accounts and how to choose the right one for you.
Types of business bank accounts
Checking account
A business checking account is critical for entrepreneurs to separate their personal finances from their business ones. Having two separate accounts is especially important during tax season, as it allows you to distinguish business and personal financial documents in an organized fashion.
Like a personal checking account, a business checking account is typically used for an organization’s day-to-day transactions, such as purchases or bill paying. Businesses can make deposits and withdrawals on these accounts and are issued checks and a debit card to make their purchases.
[Read more: Small Business vs. Personal Bank Accounts: Understanding the Difference]
Savings account
Opening a business savings account gives entrepreneurs the opportunity to save money, grow their wealth, and reduce their need to borrow capital. The funds accrued in a savings account can be used for emergencies or major investments and project funding. Entrepreneurs often use a savings account in addition to a checking account to set aside money for things like large purchases, hiring, and having backup cash reserves for the business.
Savings accounts tend to have higher interest rates than checking accounts, and this rewards businesses for storing their money in these accounts long-term. However, business savings accounts may limit the number of withdrawals you can make each month or have a higher minimum balance requirement.
Investment account
An investment or brokerage account holds a business’s cash and investments that they buy to help reach its financial goals. These investments can be stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Investment accounts can help businesses reinvest their earnings to grow their finances towards their company’s needs. Funds can be transferred to this account to purchase, sell, or maintain new and current investments. Brokers can make more complex investments to help businesses grow these investment accounts.
[Read more: Banks vs. Credit Unions: What’s the Difference?]
A business checking account is critical for entrepreneurs to separate their personal finances from their business ones.
Merchant account
A merchant account is a bank account that allows business-to-consumer businesses to accept and process electronic card transactions. Any business that is receiving payments from consumers for their products and services is required to have one. These accounts create an agreement between the business, their bank, and their credit processor stating how the business will receive the funds after a transaction is processed. These merchant account providers require a monthly or annual payment for the use of their services and charge the business per transaction.
How to choose the right bank account for your business
Regardless of which type of account you want to explore for your business, there are a few important factors to keep in mind and questions to ask yourself as you’re making a decision.
- What are the fees? Most banks charge a monthly or yearly account maintenance fee to keep your account open, and it may vary depending on the type of account and the financial institution. Be sure to understand the fees involved with any type of account you choose, and whether there are options to waive it.
- Is there a minimum balance requirement? Many banks will require a minimum monthly balance and charge a fee for businesses to use their services. Some banks will waive their monthly fee if a certain minimum balance is met.
- Are there limits on transactions? Another factor businesses need to consider is the number of transactions they’re allowed. Banks may limit how many transactions a business can process on a weekly, monthly, or quarterly basis, depending on how much money is in their account.
- Will I earn interest on my account balance? While some financial institutions offer interest-bearing checking accounts, this is more commonly an option for savings and investment accounts. If the account you’re considering does allow you to earn interest, compare the interest rates and understand your earning potential if you maintain a certain balance.
- How easy is it to set up and use the account? Checking and savings accounts are relatively simple to set up and start using, but investment and merchant accounts may require a bit more research and setup. For instance, with a merchant account, small businesses need to consider the ease of installation and use of the merchant’s equipment, as well as how scalable the service is.
Ultimately, the type of account you choose should suit your business’s short- and long-term needs, as well as your financial goals.
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