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Small Business Checking: A Primer

by on September 27, 2012

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Thinking of opening or expanding your small business? NerdWallet is here to help you navigate the labyrinth of business checking accounts.

 

 

 

Table of Contents

1. Should I open a business checking account?
2. How does business checking differ from personal checking?
3. How do business checking accounts vary?
4. What types of business checking accounts are available?
5. What is analyzed checking and who benefits from it?
6. What factors should I consider when choosing a business checking account?
7. Should I use a credit union?

Should I open a business checking account?

For legal, tax and practical purposes, business accounts are beneficial because they allow you to separate your personal finances from your business’ finances; additionally, you can deposit checks made to your business in a business checking account. Having a separate business checking account makes it easier to deduct business expenses for taxes. If any legal action is ever taken against your company, having commingled accounts can cause the court to hold your personal assets liable, so it’s best for owners to keep business and personal expenses separate.

While corporations and LLC’s should always hold a separate business account, sole proprietors and freelancers could use personal checking accounts as long as they have a reliable, accurate method of tracking business and personal expenses.

How does business checking differ from personal checking?

NerdWallet’s survey of small business owners found that many small business owners open their business checking account at the same financial institution as their personal checking account; however, they subsequently switch institutions because they incur surprising fees or are unsatisfied with the level of customer service. Business checking accounts vary widely, and the same rationale used in choosing a personal checking account cannot be applied to business checking accounts because the fee structure differs from personal checking accounts.

Personal and business checking accounts differ in several key ways.

  • Business accounts have limits on the number of free monthly transactions and the amount of cash that businesses can deposit for no charge. Because businesses tend to be more active than individuals, with more transactions and more cash deposits per month, there is a stronger possibility of incurring fees as banks charge for additional activity.
  • Fee structures are different. Both types of accounts have standard overdraft and chargeback fees, but business checking accounts have additional fees for transactions in excess of the monthly limits and excess cash deposits.
  • Business accounts have rules governing the type of business eligible for certain accounts. For example, there are certain accounts only available to nonprofits.
  • Business accounts tend to have lower interest rates than personal accounts. Most business checking accounts don’t earn interest unless the company is a non-profit.

Business accounts and personal accounts share similarities as well. They both often have monthly fees that may be waived if the account holder meets certain minimum balance requirements. Both levy overdraft fees and chargeback fees. Furthermore, as you can observe from perusing banks websites, they both have an array of account options, with some banks offering up to seven business checking accounts.

How do business checking accounts vary?

Accounts differ in several key ways: the type of business that can open them, transaction limits and cash deposit limits.

Type of Business

  • Sole proprietorships, nonprofits, and government entities are often eligible for interest-bearing accounts with lower monthly maintenance fees and a low transaction limit
  • The interest rates on these accounts are very low at the moment, ranging from .01% to 1.01%

Transaction Limits

  • While the definition of transaction varies slightly across banks, transactions usually include checks paid, teller deposits, ATM deposits, deposited items and ACH items
  • Transactions beyond that limit incur a charge of fifteen to seventy-five cents per excess transaction.

Cash Deposit Limits

  • Any monthly input of hard cash up to the predefined amount is free, but the bank charges a cash handling fee for anything above the predetermined amount, usually around .2%
  •  The cash deposit limit exists because banks find it difficult to process large amounts of cash and prefer electronic transactions
  • Business dealing mostly in cash, such as restaurants or venues that charge admission, may want to look for accounts with higher cash deposit limits.

What types of business checking accounts are available?

Banks often have several types of business checking accounts that vary primarily based on type of business, asset size, and transaction volume.

Account Type Eligibility Monthly Fee Avg. Balance to Waive Fee (if there is a fee) Transaction Limit Cash Deposit Limit
Basic All businesses $0-$5 $3,000 185 $5,000
Premium All businesses $20 $10,000 350 $8,500
Non-profit Must be a non-profit, sole proprietor or government entity $0-$5 $5,000 200 $8,500
Analyzed All businesses Varies N/A N/A N/A

Data for this table was obtained by averaging fees across 130 business checking accounts
*Analyzed checking is discussed further below

Nonprofits, government entities, and sole proprietorships are able to benefit from accounts with lower fees and higher transaction volumes than for-profit entities. These accounts sometimes earn interest as well, although the current rates are extremely low.

What is analyzed checking and who benefits from it?

For analyzed checking accounts, a banker personally evaluates your business’ individual needs and applies an earnings rate credit based on the account balance to offset fees. Larger account balances will get you larger earnings rate credits. Business with large balances ($100,000+) can benefit from these earnings rates because they can leverage their large balances to offset the costs of the account, in rare cases even turning a profit when their earnings credit is greater than the monthly account maintenance costs. These accounts typically charge fees for every transaction without giving you a set amount of free transactions like other business checking accounts.

Analyzed checking accounts are individualized based on your personal business’ needs; things like courier services to pick up large amounts of cash can be factored into your personalized recommendation. If you have high balances and high transaction volumes, you may wish to speak to a banker about an analyzed account.

For more information on analyzed checking, refer to our post “What is analyzed business checking?

What factors should I consider when choosing a business checking account?

You should pick a checking account based on the type and location of your business, your transaction requirements, and your cash deposit requirements.

If you have a business credit card, you should be aware that credit card processing is faster within the same bank. So if you have a business credit card with Chase, it might be worth it to open a checking account with Chase as well rather than because credit card payments generally process faster within the same bank.

If you are receiving a small business loan from a bank or credit union, consider what your lender has to offer. Sometimes monthly maintenance fees can be waived if you maintain a predetermined combined account balance, including your balance in your business checking account and your outstanding loan balance.

Should I use a credit union?

Credit unions usually offer lower monthly fees on their business accounts, and their focus on customer service often makes them small business-friendly. Credit unions usually don’t have cash deposit limits, making them ideal for restaurants and other businesses that deal mostly in cash. They also tend to charge lower overdraft and chargeback fees. The Boeing Employees Federal Credit Union charges no fee for chargebacks and $25 for overdrafts, while Bank of America levies a $12 fee for chargebacks and a $35 fee for overdrafts. In our survey of small business owners, many who switched to a credit union stated that they received better service they at a credit union than they had at their bank.

In our analysis of over 130 business checking accounts, we found that 39% of business checking accounts at credit unions were truly free, with no monthly fee and no waive requirements, while only 13% of business checking accounts at banks were free.

In addition to lower fees, credit unions usually offer better interest rates on deposit accounts. Hutchinson Credit Union offers a .25% interest rate on their high-yield CD and .1% interest on their business basic checking account, compared to US Bank’s paltry .01% interest rate on their basic business checking with interest account. Navy Federal Credit Union offers a free business checking account with .1% interest.

The only drawback is the limited locations of credit unions. Big banks have an undeniable advantage in their ubiquity, with ATM’s scattered throughout major cities, while credit unions often have only a few branches. But depending on the location and needs of your small business, a credit union is likely to be a good choice for your checking account.

Now that you understand how business checking fees work, head over to our business checking comparison tool to find the best match for you.

Need a business checking account?
Use our tool to find the best business checking account for your company.
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