Since there’s usually not a clear “first day” on the job as a freelancer, many of us don’t take some very basic first steps in organizing our income streams – and expenses. One of the steps that can make your life much easier down the road is opening up at least one business bank account. We say “at least one” because you may want to set up separate accounts and even credit cards tied to each of your income streams to keep better track of everything.
Why You Should Have Separate Accounts
Before actually opening a business bank account, you need to know why it’s a good idea. As with most things, being organized helps – A LOT. Whether it’s looking at if you’re actually making a profit on a particular income stream or trying to calculate your taxes, having separate accounts will help you see everything more clearly.
If you’re spending your time in the weeds, you’re not alone. We recently asked several hundred freelancers about how they organize their finances. Only 22% reported having a separate business bank account. As freelancers, it’s all too easy to intertwine personal and business expenses. You want to set up your separate business bank account, so you can focus on starting and growing your business instead of untangling your finances.
Another significant reason to have a business bank account – and even credit card – you use regularly is the benefit of documentation. Making sure you have a separate account from which you pay yourself an income, track expenses, can show growing or significant revenue, and establish a credit score has many advantages. From this one umbrella source, you can grow your potential to take out business loans, rent a space or a home, take increased tax deductions or show potential investors your businesses’ stability or potential. As a freelancer, you can’t predict every issue you’ll be facing in the future. But with an established business bank account, you’ll be able to create a separate credit and potential for your growing needs and interests.
What Type of Business Bank Account Should You Have?
Once you have decided to open a business bank account, your next step is determining which kind of account you should open. Often your first round of choices entails a checking account, a savings account, and whether you want a credit card or not with that debit card.
So, where should you start? You need a bank account with services that match your needs.
- Will your account be used primarily for taking deposits and then making a few payments to yourself and maybe paying for supplies?
- Are you going to need to take withdrawals more than six times per month?
- Can you keep a certain balance in the accounts? How much is it going to be?
- Are you going to want to have a couple savings accounts – for taxes, general big equipment purchases, etc?
- Are there other business services you will need?
- Do you want your personal and business accounts tied together for easier wiring of funds?
- Are you going to have a regular overage with your supplies that you might want a credit card to cover for a few days?
Write down the answers to the questions above before you look for a particular bank or banking solution. Having a clear picture of what you want to use this bank account for will narrow down the types of accounts you can – or should – open. There are also often fees and requirements associated with different types of accounts. Once you know what you’re looking for, you can begin your search for a bank that meets your needs.
Pick a Bank
Alright, now you know what you need your accounts to do for you. It’s time to look for a bank.
It’s important to do your homework. Take the time to research different banks. NerdWallet and Bankrate are great to look at in terms of dividends if you’ll be carrying a decent balance or if you want to look at annual percentage rates (APR) across credit cards. Once you’ve looked around a little, you may want to head to your existing bank if they have competitive rates or you want to negotiate with them. Opening a business bank account with the same bank that handles your personal account may be worthwhile, as they want your business and may offer special deals for a current client or if you come in with a little homework done.
Make sure to negotiate your terms and expenses. Almost 70% of people who sat down with a banker were successful in getting a better deal when they negotiated their fees. Use some of these tips to prepare for your negotiation. If a bank isn’t able or willing to work with you or meet your needs, go elsewhere. You’re worth the extra effort to get better terms and service.
Get Your Documents Together
Depending on what kind of business you run (sole proprietorship, LLC, S-Corp or C-corp being the most common) you’re going to need a few documents.
First, you need to get a Taxpayer Identification Number (TIN). This can be a Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), or a Federal Employment Identification Number (EIN). We highly recommend getting an EIN to use for your business bank account and working documents. This protects you from having to give out your SSN like candy. You can get one for free from the IRS if you’re a sole proprietor – or at Lance, we can help you get one as part of your business incorporation.
Almost all banks will require you to have an EIN when opening a business bank account. Once you have your TIN, the remaining documents needed to open the account will vary depending on the type of business you run and the bank you choose. Sometimes they’ll ask for your Articles of Organization and your Board Agreement if you have filed as an LLC.
If you’re a sole proprietor or just starting a side hustle, you can simply open a separate personal checking and savings account or credit card. This will help for tracking purposes and for developing good habits around your business finances.
Opening Your Account
You can open your business bank account online or in person. Opening a bank account online is easy and convenient, but opening your account in person ensures a better understanding of the account. Being face-to-face with your banker allows them to walk you through all components and fees or terms of your account. This may be a good idea if you are not completely sure of the account you need to open. Or if you’re looking to negotiate better terms. Often credit unions across the US will give more favorable terms as well.
Once you’ve opened your business bank account, you are free to start depositing payments from your clients and linking to various payment platforms like PayPal and Venmo! Start bringing in that cash money!
Staying On Top
Now that you’re all set, that was fun, right?! That prospect of making more and watching your bank account grow – so exciting! But, along the way, make sure you’re keeping that necessary balance and using your various cards to keep personal and professional purchases separate.
There’s still a lot involved in making sure you’re able to track if your businesses are profitable. It can be challenging at first to get everything started and develop better habits, but we promise it’ll get easier! It will be well worth your time, and we’ll be here to help you navigate along the way!