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What is a business bank account, and how do you use it responsibly?

Imagine the feeling of being on top of your finances, knowing exactly how much money you have in your account and where it came from. If you're a business owner who wants to take charge of your financial world, using a business bank account to separate personal funds from business funds is an excellent way to do so. In this article, we'll show you how to open one and use it responsibly.

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What is a business bank account, and how do you use it responsibly?

Imagine the feeling of being on top of your finances, knowing exactly how much money you have in your account and where it came from. If you’re a business owner who wants to take charge of your financial world, using a business bank account to separate personal funds from business funds is an excellent way to do so. In this article, we’ll show you how to open one and use it responsibly.

Business Bank Account Checklist: What You’ll Need to get started

To open a business bank account, you will need your articles of incorporation or organization, your EIN, and your personal identification documents, such as a government-issued ID. You may also need to bring at least $25 for your opening balance.

The Basics of Opening A Business Bank Account

Once you’ve gathered the necessary documents, visit the bank to open the accounts. While you can open business bank accounts online, you may find that it is faster to do it in person, as you are there to verify and sign all necessary documents in front of the banker. Once you are ready, the first three business bank accounts that you should consider opening are:

1. A business checking account

This account will generally be used to receive revenue from day-to-day operations, and it will likely become the primary account that lenders ask for when it is time to verify your cash flow.

You may also choose to use this account for small purchases and bill payments, although we recommend using a business credit card for daily purchases and recurring payments instead.

2. A business savings account

This account will generally be used to hold revenue that is not needed for the daily operations of your business. A business savings account may often be used to reserve money for larger expenses such as payroll.

3. A Certificate of Deposit

Opening a Certificate of Deposit, or CD, is a smart move when your business has a larger amount of money available to store away and collect interest on. A CD is a better option for storing money than a savings account because it will usually offer more attractive interest rates than what banks typically offer for savings. However, CDs do have one major drawback, which is that you must leave your money in the account for a set period of time, or pay a fee for an early withdrawal.

Why You Should Always Open A Bank Account For Your Business

Opening a business bank account is a critical step in the establishment of your business. These accounts help to keep your business and personal finances separate, and they provide a clear record of your income and expenses. When it is time for your business to seek growth financing, or other forms of business credit, bank statements from your business bank account will be one of the first documents that lenders ask for.

A business bank account also helps to validate the age of your business. Even if you started your business a decade ago, but you only opened your business bank account a year ago, lenders will often treat your business as if it is newer, simply because that is the only cash flow history that they can verify. Because of this, opening a business bank account is one of the very first things that you should do when starting your business.

What is your Consumer Account Rating, and why is it important?

Once you have opened your business bank account, it is critically important that you manage it responsibly and maintain a healthy balance, as this will protect your Consumer Account Rating, or Bank Rating for short. Most people are aware of the existence of business credit scores, but few people understand that they have this other credit score for their banking history. A Bank Rating is a measurement of the average value of a business’s bank accounts over a 90 day period. When a lender requests your last 3 bank statements, calculating your bank rating is one of their objectives, as this number is a strong indicator of your ability to manage money and pay debts.

What are lenders looking for in a Bank Rating?

An ideal candidate for a loan will have a Bank Rating of 5 or higher. This means that your average bank balance over 90 days was $10,000 or more. A rating of 4 indicates that your account balance averaged between $7,000 and $9,999 over a period of 90 days, and the scale continues from there.

Now that you know what a bank rating is, and how it impacts your ability to borrow money in the future, you should aim to maintain an average balance of $10,000 or more so that your rating is a 5 or higher. But that is easier said than done, right?

How to maintain a strong bank rating without losing access to your operating capital.

$10,000 is a lot of money for any business to leave sitting in an account unused, especially if you are a new business. But you also don’t want to jeopardize your ability to borrow money in the future. So how can you maintain a high balance while still having easy access to your funds? The answer is to open a secured business line of credit.

In the next article, we will go over the details of business lines of credit, and how you can use a Certificate of Deposit to secure one without jeopardizing your bank rating.

Conclusion:

Opening a business bank account is one of the most important parts of correctly starting a new business. Once you have gathered all the necessary documents, you can open a checking account, a savings account, or a certificate of deposit for your business. It is important that you use this account responsibly, as it will provide a record of the cashflow history for your business. Once you have your business bank account open, and you can show a history of healthy usage over a period of at least 90 days, you can use these accounts to access even more funds from lenders.

And as always, if you need assistance with understanding your financing options, feel free to contact the team at MyBusinessCredit.com, and work with a knowledgeable professional who is ready to help!

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