3 small business banking mistakes to avoid
And how to protect your business
Running a business is difficult. Small business owners like you know that managing everything for your business can be overwhelming. And when you’re overwhelmed, you can be prone to making mistakes that can be potentially detrimental to your business operation. This is especially true when it comes to financial decisions. From bookkeeping to getting a new business off the ground, these financial mistakes can be costly.
So in this article, we’ll help highlight some of the most common small business banking mistakes and how to avoid them. But first, let’s understand why a business bank account is so necessary to a successful business.
What’s a business bank account?
As the name suggests, a business bank account is a special bank account that you can use to keep your company’s finances separate from your personal finances. You can generally do everything you’d do with a personal bank account with a business bank account. You’ll make deposits, cash checks, pay invoices, send ACH payments, and even pay employees with a business bank account.
One of the main benefits of a business bank account is that you’ll have all your business records of debits and credits in one place. Your income and expenses are critical for filing your taxes accurately. If you use a shared business and personal bank account, it can be really messy sorting through personal vs business charges or payments. This can make your taxes needlessly complicated and take more time than they should.
To open a business bank account, you’ll need to choose a bank (more on this later). Once you’ve made this choice, you’ll need your business name and address, and any Doing Business As (DBA) name or trade name. You’ll also need to bring a few documents with you when you go to the bank, depending on your business structure:
- Sole proprietorships: Business name registration certificate, business license
- Partnerships: Partnership agreement, business name registration certificate, business license, state certificate of partnership
- LLCs: Articles of organization, LLC operating agreement, business license
- Corporations: Articles of incorporation, corporate bylaws, business license
Depending on your bank, you may also need to bring an opening deposit to start your account. Some banks allow you to open an account with $0, so check with the banks on your list to understand their requirements. In some cases, you may also need to present a business plan. Now that you’ve learned more about opening a business bank account, let’s look at three business banking mistakes to avoid.
Three business banking mistakes to avoid
While there are many business banking mistakes you should avoid, we’ll focus on three of the most common ones.
Mixing business and personal accounts
As you’ve already learned, a business bank account is an important way to separate business and personal finances. Things get even more complicated when you mix your business and personal expenses. While this may not seem like a big issue to you as you’re starting to find your business’s footing, it can be a tangled mess come tax time. That’s because you’ll need to report income and business expenses to the Internal Revenue Service (IRS) for business tax purposes. Mixing business and personal accounts make it harder to track all the possible business deductions. That’s why a separate bank account for your business can be so crucial.
In addition to opening up a business bank account, you should also take advantage of a business credit card. This step can also help you keep expenses separated and help you track possible deductions. Again, having all of these business records in one place can help streamline your tax preparation at the end of the year.
Choosing the wrong bank or account type
When it comes to choosing the right bank for your business, there are thousands and thousands to choose from. A common mistake is choosing a bank or bank account based on convenience rather than functionality. This might mean choosing a savings account when you need a business checking account. Research the options to find a bank that meets your business needs. Here are a few key considerations to look for when choosing a bank and an account:
- Cost: How much does the business bank account cost? What benefits do you get for this cost? Are there any incentives such as waived fees if you maintain a certain account balance? Do you have to maintain a certain minimum monthly balance? You should be asking each of these questions when trying to decide on both the bank and the specific account.
- Flexibility: You shouldn’t think about your business just where you are now. You should also consider your company’s growth trajectory and evaluate if the bank or bank account can scale with your growing business. Does the bank offer multiple account types? Do they offer business loans or other lines of credit?
- Features: Another consideration that shouldn’t be overlooked is your bank’s features. The ease of use of the bank's features, including online banking access, are essential for monitoring your business's financial health.
Forgetting to track your budget and spending
A crucial part of running your business is maintaining and sticking to a budget. Wasting money is never good, but it’s far more crucial not to waste money that could be spent building your business. Therefore, planning your financial moves before you make them can pay dividends. Cash flow management is a key skill of successful businesses, and the easiest way to get there is by budgeting.
Making a budget is just the start. Besides making the budget, the other key component is making sure you keep track of your spending. It’s like losing weight—consistency is key. To help you remember to track your budget and spending, you can set reminders to review your business finances on a weekly or monthly basis. Some financial institutions even offer budgeting tools and spending reports so you can analyze and forecast your spending.
When it comes to running your business, it’s not always easy. But taking steps to protect your financial health while getting your business up and running can help propel you to sustained growth in the years to come. After reading this article, you should have a better sense of business bank accounts and how to avoid some of the most common money mistakes associated with small businesses.
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