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Contractor banking: choosing a business bank account

Contractors who have decided to trade via a limited company must set up a separate bank account for their contracting business, and may choose from a range of business bank account providers, including both high street banks and alternative providers of business current accounts.

Because a contractor’s limited company is a separate legal entity from the contractor, it requires its own bank account in order to accept payments from agencies and clients, and to pay business expenses incurred by the contractor.

Umbrella company contractors are not required to open a business bank account, because they are employees of their umbrella company, which will have the financial infrastructure in place to accept payments from agencies and clients, and to pay contractors their fees and expenses.

Business banking is not the same as personal banking

It’s natural for contractors to consider opening their business bank account with the same bank that holds their personal account, particularly if the contractor has had a positive experience with their bank.

However, most banks’ personal and business operations are separate operations. There can be significant differences between personal and business banking services, not the least of them being that banks tend to charge business customers to have a business account! It should also not be assumed that just because a contractor has a personal account with a particular bank that they will automatically be approved for a business account by the same bank.

Because a contractor's limited company is a separate legal entity from the contractor, it requires its own bank account in order to accept payments from agencies and clients

All the main high street banks operating in the UK and several of the new challenger banks offer a wide range of business banking packages. Contractors should research what’s on offer from alternative providers and take recommendations from other contractors or from their accountants.

Factors to consider when choosing a business bank account

Key factors to consider when choosing a business banking package for a contracting business include:

  • It’s not necessary to choose and established street bank. Other providers exist which offer different benefits which may be applicable to contractors. In selecting a bank check whether they understand the requirements of contractors and that they provide all of the relevant services
  • The type and amount of account charges, such as account fees, cheque fees, card charges, bank transfer fees and so on
  • Does the business account offer features such as company credit and debit cards, in addition to business cheque books if these are specifically needed?
  • Start-up packages that include periods of free business banking; many banks offer new customers free banking for 12, 18 or 24 months but beware that once these introductory “free banking” periods end you are likely to incur the full business banking tariff, at which point you may be less inclined to switch provider
  • The availability of telephone and online and mobile banking; these are crucial factors for contractors based at client sites without convenient local bank branches
  • Interest on deposit accounts can be important for some contractors who run an ongoing cash surplus, noting that while interest rates remain low the benefits of these are significantly reduced. Many banks also offer additional long-term deposit options and corporate investments, such as bonds
  • The speed of account opening might be important for contractors who are due to commence their first contract at short notice and will need to provide a proof of business account to a recruitment agency in order to get paid. This can vary significantly between high street banks and alternative current account providers, based on whether the application is online or offline, whether a branch visit is needed and based on the levels of credit assessment undertaken as part of the application approval process.

Online contractor accountancy providers sometimes have established partnerships with particular banks, where banking and accountancy might be integrated. The advantage to the contractor of this arrangement is that the bank may transfer transaction data needed for providing the accounting services directly to the accountant. Contractors considering a contractor accountant that provides this integrated service should check which bank their preferred online accountant is partnered with, and ensure they are happy with the interest rates, charges and features offered and the account opening process.

In addition, some professional and business organisations provide members with offers on bank accounts; for example, Federation of Small Businesses (FSB) members have access to free business banking with the Co-operative Bank.

Contracting businesses are not typical SMEs

Some banks sell ‘added-value’ services, such as a dedicated business relationship manager or a business specialist in every high street branch. Or the start-up package might come with a free training course, business planning software and other special offers.

Although some contractors may still prefer a more personal touch with their bank, the reality is that most contracting businesses’ banking requirements are small compared with typical small to medium sized enterprises (SMEs). That means that many of the ‘extras’ offered as part of business banking packages are simply not relevant to contractors and contracting businesses.

For example, most contracting businesses do not require banking services such as loans, overdrafts and access to small business banking specialists; nor do most require business planning software.

Contractors will typically only have a small number of banking transactions each month. All of these will probably be handled electronically, and the contractor may never find the need to visit a branch. Therefore, contractors may find features such as quick set-up, online or mobile banking and low transaction costs to be more important than the offer of a wide branch network and a business banking relationship manager.

Having decided which business bank offers the right combination of banking services, low fees and other features that suit the contractor’s banking needs and lifestyle, the next stage is to go through the application procedure. Money-laundering regulations mean banks have to undertake a number of checks on new account applications and many high street banks will also carry out credit checks on both the business and the directors. So depending on the bank that has been chosen contractors may need to apply for an account at least a couple of weeks before they need it to be ‘live’.

Updated: 28 July 2016

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