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UK startup essentials: business bank accounts explained

UK startup essentials: business bank accounts explained

Welcome to UK startup essentials, where we cover business basics and key topics like taxes, insurance and more. All the things you need to take care of when launching a startup.

This guide focuses on business bank accounts.

If you’re setting up a limited company, you'd be wise to set up a business bank account in the business’s name before you start trading.

While this isn’t a legal requirement, it’s necessary to remain compliant with various accounting responsibilities. That aside, separating business and personal finances is generally considered best practice.

Here’s everything you need to know about how to choose and open a UK business account. 

Why do I need a business bank account?

Business accounts separate one’s personal finances from their company finances, acting as a statement of intent that ignites a startup’s journey.

Equipped with a business bank account, you can proceed to fund your venture and start investing in its growth. But there are plenty of other reasons why it's a good idea.

1. Money management

From income to expenses, having a business bank account simplifies the process of tracking financial transactions.

Instead of sorting through a mix of personal and business records, you'll have your company finances neatly organised in one place. The clear division between the two makes it much easier to analyse financial performance and balance the books.

Your future self will thank you.

2. Reporting & record-keeping

Keeping all your business transactions in a single account simplifies your financial records, so you can quickly generate financial statements or summaries, which is handy for any legal or tax purposes that require accurate financial reports.

Moreover, if your company is audited, showing your complete financial records will be easier if you have a separate business bank account. Compiling a clear financial history can simplify the audit process and ensure compliance with all financial regulations.

Assurance for them and peace of mind for you.

3. Investment

A business bank account is non-negotiable if you're looking for external funding, as investors want to see a clear record of your company's financial health.

It also demonstrates your dedication to efficient financial management and transparency, giving potential investors the confidence to put their cash on the table.

On a related note, a clean and tidy cap table will impress them too. 

4. Compliance

A separate business bank account is highly recommended for limited companies and limited liability partnerships in the UK.

While some sources suggest this is required by law, that isn’t strictly true, as the Companies Act doesn’t specifically mention establishing a separate bank account.

However, the Act does stipulate that company finances need to be clearly separated, and there are several mandatory responsibilities that make a separate company account virtually non-negotiable, such as protecting figures from falsification and identification of dividends.

So, while it’s technically possible to run a limited company with one’s own personal business account, this could unintentionally lead to serious issues down the line.

And when we say serious, we mean serious. For example, money laundering in exceptional circumstances where payments can’t be identified.

Additionally, as a limited company, your personal assets are protected should the company face financial difficulties. This protection could be compromised if there is no clear distinction between your personal and company finances.

Ultimately, setting up a business bank account from the start ensures you're operating within the law and helps prevent potentially sticky situations.

What types of business bank accounts are there?

There are three main types to choose from, but you can open a combination of all of them if you wish. For example, you’ll nearly always need a business current account, but can open up a high-interest savings account to grow any excess cash. 

1. Business current account

The staple business current account helps you handle everyday banking, from paying suppliers to receiving client payments. It’s broadly equivalent to a standard current bank account but in your company’s name and with specific add-on products tailored to businesses.  

This account is your primary hub for managing cash flow and daily financial operations and is offered by most leading high-street banking providers like Lloyds, HSBC, NatWest, etc., challenger banks such as Tide, Monzo and Starling and many specialist banks that offer bespoke banking services. 

2. Merchant services account

A merchant services account is essential if your business accepts customer card payments. If you intend to sell physical products and services, regardless of the volume, this one’s for you.

This type of account facilitates debit and credit card transaction processing, acting as an intermediary between your customer's bank and your business account.

It's important to differentiate between a simple card reader (or payment gateway) connected to your bank account, such as those offered by platforms like Stripe or Square, and a merchant services account.

Solutions like Stripe or Square might be suitable for small startups processing lower monthly card payment volumes (around £5,000 and below). 

On the other hand, merchant services providers, like Worldpay, are more akin to acquiring banks and often offer card payment processing at lower fees compared to gateways like Stripe and Square. 

Major providers like Worldpay typically offer lower rates for volume payments than simple point-of-sale solutions like Square, and differences of just 0.5% can make a big impact on your bottom line if you’re selling high volumes. 

3. Business savings account

A business savings account can put your money to work if you accumulate surplus cash that you don’t need to immediately reinvest.

These are similar to personal savings accounts but are designed specifically for longer-term savings, offering higher interest rates than current accounts.

Savings accounts include easy-access accounts which are similar to current accounts or notice accounts. Notice accounts require you to provide notice before you withdraw, usually within the region of two to six months. By locking your money away, you’re rewarded with a better interest rate.

What do I need to open a business bank account?

The exact process differs between providers, but you’ll typically, you'll at least need the following:

1. Identification

Proof of identity and address for all directors, partners, or anyone with significant control over the company. This might include a valid passport, driver's licence, or other government-issued identification, along with a utility bill, council tax bill, or bank statement as proof of address.

2. Business proof

Proof of your UK business address, such as a utility bill, lease agreement, or business rates bill. You’ll also need a company representative living in the UK (usually a director or an employee.

3. Company registration number

You'll need your company registration number for limited companies, which you receive when registering with Companies House. You can find this number on your certificate of incorporation and on any official documents sent by Companies House.

4. Business details

Information about your company’s structure, ownership, and operations, which might include a business plan, details of your products or services, your target market and projected revenues. Some banks may also ask for your expected turnover and details about your clients and suppliers.

How to choose the right bank account 

There are 225+ international banks operating in the UK, many of which support startups like yours.

While high street banks offer tried-and-tested services, there are plenty of niche and upcoming providers that might suit some businesses better.

Selecting the best account for your specific circumstances is important, but if you make the wrong choice it's not the end of the world. If you're not happy or find a better deal elsewhere, you can switch accounts using the UK’s Current Account Switch Service.

Things to consider:

1. Fees and charges

Business bank accounts often come at a monthly charge, but many offer free banking for a trial period. Look at the cost for day-to-day banking and charges for additional services like international payments, using an overdraft or processing cheques.

2. Banking services

Identify the services you need for your operations. Does the bank offer online and mobile banking, invoicing, payroll services, or merchant services? Some banks also provide access to business advisors.

3. Customer service

Good customer service can smooth out your banking experience, especially when dealing with large payments. Read customer reviews to get a sense of the bank's reputation. consider their service hours, the availability of a dedicated support team and how easy it is to get help when you need it.

4. Integration

If you use or intend to use accounting software like QuickBooks or Xero, check if the bank integrates with these tools. This can streamline your accounting responsibilities and ease tax compliance headaches.

Don’t rush into choosing a bank account – use a comparison tool to evaluate different banks based on the factors above. Or reach out to a fellow founder; they may have a recommendation.

What to expect after applying

Submitting your business banking application is just the beginning of the process. The bank then undertakes a process known as "Know Your Customer" (KYC) checks and possibly also enhanced checks as part of anti-money laundering (AML) regulations.

During this process, the bank validates the information provided and might also assess the risk associated with your business.

The turnaround time varies from bank to bank, ranging from a few days to a few weeks.

During this period, it's common for the bank to request additional information or documents. If you’re applying for credit, you’ll need to provide financial information, and your personal credit rating will be taken into account.

Once approved, you will receive the account details, including your sort code, account number, and information about online banking. Don’t start trading until you’re given the green light by your bank.

Protecting your account

Safeguarding your business bank account is crucial. 11% of all businesses suffered a cyber attack between 2022 and 2023 – you can reduce your risk with robust account security hygiene. 

While UK bank accounts obey strict security requirements, the risks of fraud for business bank accounts remain higher than for personal accounts. 

Here are some vital steps to help secure your account:

1. Regularly update passwords

Creating complex, unique passwords for your online banking and changing them frequently is critical to protecting your account. Passwords should include upper and lower case letters, numbers, and special characters to maximise security.

It's also important to avoid using obvious information, such as your business name or date of establishment, in your password.

2. Monitor activity diligently

Adopting the habit of regularly reviewing your bank account statements is a good security practice. Look out for any unusual or unexpected activity and scrutinise every transaction detail.

If you spot any transactions you don't recognise or that raise your suspicions, report them to your bank immediately. Early detection of fraudulent activities can limit any potential damage.

3. Enhance your cyber-smartness

Be vigilant against cyber threats like phishing scams, where fraudsters might attempt to trick you into revealing sensitive information via deceptive emails, text messages, or phone calls.

Banks will never request your full password or other confidential data such as your PIN or full card number. If you receive a suspicious request purportedly from your bank, do not respond and inform your bank immediately.

4. Secure your devices

Ensure any device you use to access your online banking is secured. Keep your devices' software updated, as software updates often include security enhancements.

Install and maintain a robust security software solution, and be wary of using public Wi-Fi for banking transactions.

Public networks may lack necessary security measures, leaving your sensitive information vulnerable to interception.

5. Provide employee training

If your business model requires multiple employees to access the account, ensure they are adequately trained on security measures.

This training should cover recognising and handling phishing emails, creating strong and secure passwords, understanding the significance of protecting sensitive information, and the procedures to follow if they detect suspicious activity on the account.

6. Two-factor authentication (2FA)

Consider using 2FA for your online banking. It’s best practice to enable 2FA from the start, though banks often have their own robust login protocols. 2FA adds an extra layer of security as it requires two types of identification before granting access.

For instance, after entering your password, you may be required to enter a code sent to your phone or provide a fingerprint.

Launch your startup with Vestd

Together with incorporating a company, setting up a business account is like placing your marker in the ground – it’s the push you need to get your venture moving!

Setting up UK business bank accounts is relatively straightforward, but conducting extensive research will enable you to get the best deal for your long-term needs.

Luckily, you can switch bank accounts later on if you need to – so don’t panic if you’ve already chosen one. 

Once you’re all set up, Vestd can help you find your feet with co-founder equity agreements, digital cap tables and easy-to-use doc templates covering everything from non-disclosure agreements (NDAs) to intellectual property agreements (IPAs).

Get ready for takeoff. Launch with Vestd today!

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