If you own a small business, you should open a business bank account to organize your finances. While this may seem like a simple task, it requires good decision-making and careful thought. Small business experts shared some of the common mistakes business newbies make with their commercial accounts, and how you can avoid doing the same when opening your own.
1. Incorrect or missing information at account setup
New small business owners and entrepreneurs frequently make the mistake of bringing the wrong paperwork to the account-opening appointment. Each bank or credit union may have different requirements, so when booking the appointment, ask the banking officer exactly what you'll need to bring to the meeting.
"Don't worry about assembling a great deal of business documents," said David Bakke, small business specialist at personal finance website Money Crashers. "In most cases, all you need is your Social [Security] number, a tax ID and other general information." [How to Open a Business Bank Account]
Small business owners also frequently make the mistake of opening their account using their Social Security number instead of their Federal Employer Identification Number, said Michael Rozbruch, founder of Michael Rozbruch's Tax & Business Solutions Academy.
2. Not having a designated business account
According to a research conducted by Researchscape on behalf of Seed, 32 percent of business owners aren't separating their personal and business bank accounts.
"This can lead to serious accounting, tax and reporting challenges for business owners," said Brian Merritt, CEO and co-founder of Seed. "Save yourself problems down the line and separate your business and personal accounts from the get-go. You'll decrease your legal liability, and your life will be a lot easier at tax time."
3. Not planning check-signing authorities
Rozbruch noted that small business owners often forget about planning for business check signing.
"They don't set up the check-signing tasks with checks and balances in mind," he said.
If your business includes a partner or staff members, will your business checks require one signature or two? If you require two signatures, will this be for all check amounts, or only amounts over a specified dollar value? Make these decisions before opening your account, and you'll avoid the headaches of making changes later.
4. Choosing the wrong bank for your business
Seed's research found that 63 percent of small business owners choose the same bank they use for their personal account. While it might not seem like a bad idea, you might be limiting yourself to a bank that doesn't meet your business's needs.
"The problem is that consumer banks don't offer all the features and services that small businesses need to succeed, such as cash flow visibility," said Merritt. "Failure to adequately anticipate cash flow can lead to loss of business. Look for a banking partner that offers services like cash flow insights and reports. This will save valuable accounting time and offer total visibility into your finances at all times."
If you're dealing with a credit union, the first question to ask is if they offer a business checking account, a feature that isn't available through all credit unions, said Elle Kaplan, CEO and founding partner of capital management firm LexION Capital Management. Another option is to check the business banking services offered as part of a group or organization you belong to.
"If you belong to an affinity group with access to business checking through specialized credit unions, like those for veterans, former teachers, writers or performers, then that could be a great option," Kaplan said.
Additionally, 40 percent of small business owners pay monthly maintenance fees to their banks, according to Seed's survey. However, there are free banking service options that many owners do not know about.
"Sometimes it's as easy as calling the bank and asking them to remove the fee," said Merritt. "With an average monthly fee of $20 to $25 per month, business owners are unnecessarily shelling out hundreds of dollars per year. Avoid monthly maintenance fees and select a banking partner who offers transaction services like bill pay for free."
5. Ordering the wrong checks
A surprisingly common error, said Rozbruch, is that many new small businesses print the wrong company name on checks. For example, they might use a "doing business as" (DBA) name instead of the entity's legal name. In some scenarios, using a DBA name on checks poses a problem, especially if the business accepts credit card payments online. This is because of the increase in online banking fraud.
"Credit card merchant processors such as PowerPay require that the entity's legal name match that on a void check to ensure they are one and the same, especially for startups," Rozbruch said.
New entrepreneurs should also check with their bank to see if the account package includes electronic check printing that's compatible with the business's accounting software. Rozbruch noted that some banks allow you to order checks that can be electronically printed via programs like QuickBooks.
6. Not maintaining the minimum monthly balance
Some business bank accounts offer monthly fee waivers if the account balance stays above a stated minimum every day of the month. Don't pay unnecessary bank fees by letting your balance fall below the minimum. Better yet, set a goal to keep slightly more than the minimum required in your account.
"I recommend keeping the minimum amount plus a few hundred in your account," Kaplan said. "That way, you won't find yourself in the position of helping the bank earn money at the expense of your business."
Additional reporting by Sarita Harbour. Some source interviews were conducted for a previous version of this article.