7 reasons why your business needs a savings account

People often open personal savings accounts to put money aside for goals like buying a home or paying for a wedding. A business savings account serves a similar purpose – helping you build funds over time to support growth and cover future costs such as tax bills.

Both are smart ways to plan for the future, and the benefits don’t end there. Here, we explore seven key reasons to open a business savings account.

At a glance

• Not everyone needs a business savings account, but the benefits attract firms of all sizes

• A business savings account provides a convenient way to keep personal and work savings separate

• You earn more interest in a business savings account than in a business current account

What is a business savings account?

A business savings account is similar to a personal savings account, providing a safe place for money that would otherwise languish in a current account. The most obvious benefit of having a savings account is to earn interest on money you don’t need immediately.

Business savings accounts differ from personal ones in that the money held in them and the interest earned on them is for business use only.

Read more: Business savings accounts explained

What are the benefits of having a business savings account?

The main reason to have a business savings account, alongside your personal savings, is to keep work and home finances separate. But there are plenty of other advantages, including:

1. Better money management

All businesses need a steady cash flow. However, there are different streams of money coming in and going out all the time, such as when paying suppliers and staff or receiving payments from clients and customers. 

Cash for day-to-day expenses should flow into and out of a current account. Money that’s not needed immediately, such as cash to cover salaries, equipment, business insurance and generated through cost-cutting measures, is better off being put into a savings account. This reduces the risk of overspending.

Read more: How to manage your cash flow effectively

2. Earning interest

Just as you don’t earn much interest with a personal current account, the same goes for business current accounts.

Rates differ between providers, but you can get easy access, notice and fixed-rate business savings accounts, just as with personal savings accounts. At the time of writing, you could earn more than 4% APR with the best accounts.

3. Ring-fencing your money

There’s little point in building up a healthy pot of savings if your account provider goes bust and you lose it all. Fortunately, the Financial Services Compensation Scheme (FSCS) protects up to £85,000 per financial provider.

If your savings are approaching or exceed this amount, it’s wise to spread your money across multiple accounts with different providers to stay fully covered.

4. Funding future investment

While a business credit card or loan may help you raise the funds to afford more staff or another type of expansion project, debt adds to risk. What if your plans don’t work out or take longer to achieve? You could be left with a struggling business and a lot of money to repay.

A dedicated savings account, regularly topped up, may mean you don’t need to rely on anyone else to finance your future. You just need to decide how much to save for your business.

5. Being tax ready

With the day-to-day running of a business, it’s easy to forget about the inevitable tax bill. If you have a business savings account, into which you put a decent proportion of your monthly takings, you can ensure you won’t fall foul of HMRC. 

6. Easy business current account crossover

Most business current account providers also offer a savings account. With both in place, you can quickly move money between the two, making it easy to cover emergency payments or ensure excess cash isn’t left in a 0% current account when it could be earning interest in a savings account.

7. Boosting your business credit rating

You have no business credit score when you start your own company. This makes it more difficult to obtain loans and other types of finance, and it can deter potential clients, who may prefer to work with a company that has a proven track record. 

Over time, your credit rating will improve if you manage your money well, and having a savings account can help. While not a credit facility, having money in a business savings account to fall back on can help you avoid missed payments, which would affect your credit score. 

Read more: 5 ways to boost your business credit score

Do I need a business savings account?

Despite the range of benefits on offer, a business savings account may not be right for everyone. There’s no legal requirement to have one, unlike a business current account, which you must have if you run a limited company. 

While the advantages lead many firms to open a business savings account, there are exceptions. Many sole traders manage without a business savings account, because they’re free to use their excess cash as they see fit.

Other firms may have staff to provide for and partners who share financial responsibilities. But even sole traders may find it useful to draw a clear line between their personal and business finances.

Are there any disadvantages to a business savings account?

There are many benefits of having a business savings account, but they are not without potential pitfalls. Here are three things to watch out for:

• Account fees – Some banks charge business account holders. In some cases, there is a 12-month interest-free honeymoon period, followed by a monthly fee 

• Withdrawal fees – Fixed-term or notice accounts are available. These attract withdrawal fees if you need to take money from the account early. While this is also the case with personal savings accounts, financing a business is less predictable, meaning immediate access to funds is something any firm could need on a fairly regular basis

• Interest rates – Don’t assume business savings account interest rates are always better than those available with personal savings accounts. You can sometimes get higher interest rates with personal easy access accounts and one-year fixed rate bonds than with their business equivalents.

Read more...

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• How much should your business have in savings?