The best small business current accounts

Picking the best bank account for your business can seem like choosing between the devil and the deep blue sea. The banks seem to have little interest in offering business customers a good deal (Ruth Jackson writes). The situation is so bad that the Competition and Markets Authority (CMA) is to launch an investigation into the lack of competition in the sector.

“Millions of small businesses have been denied genuine choice in banking for years,” says Andrew Tyrie MP, chairman of the Treasury Committee. “Customers do not know how much they are being charged, switching is perceived to be difficult, and would-be competitors in the market face high barriers to entry.”

The investigation is widely seen as long overdue and will hopefully help to kick-start a more competitive environment for consumers. In the meantime, here’s how to find the best business account for you.

Do I need a business account?

Sole traders who don’t make lots of transactions or deal with large sums of money should try to stick with a personal current account rather than a business account.

Personal accounts are often free, and some pay interest — Nationwide and TSB have accounts paying 5 per cent. If you opt for a personal current account, set one up that is separate from your everyday account. This will make it easier to keep track of your income and business expenses for your accounts and taxes.

However, if you are running a limited company or need an account that can handle large, frequent transactions, a business account is for you.

What deals are on offer?

Business accounts tend to charge you for everything , from depositing money to online transfers, while some charge you a monthly fee that covers all costs. If you are a new business, several banks will let you set up a free account for a set period. NatWest’s Start-Up account is free for two years and comes with a £500 fee-free overdraft, so is a good choice if you anticipate cashflow being an issue in your early days.

This account also comes with free access to online business courses advising on employment law and health and safety rules. Once the free period is up you either pay a fixed fee of £25-£55 a month, depending on your turnover, or pay for all your transactions individually.

If you are likely to remain in the black, Santander’s Start-Up Business Account pays 0.25% credit interest and offers free day-to-day transactions for a year, or 18 months if you are already a Santander customer. After that the account costs between £7.50 and £40 a month, depending on how much cash you have deposited and your withdrawal limit. TSB’s business account is free for the first six months. After that you pay a fixed fee of between £5 and £40 a month, depending on how many transactions you make.

How can you cut your costs?

Many business accounts charge for each bit of activity on the account, from deposits to withdrawals to online transfers. There are, however, two ways to significantly reduce your costs. TSB offers a discount to customers who do most of their banking online. Sign up for its Electronic Business Tariff and you will pay £5 a month regardless of how many transactions you make. All electronic debits and deposits are free. Unfortunately TSB is one of the few banks offering this kind of discount, although that is something that will hopefully change once the CMA takes steps to make the industry more competitive.

Another way to significantly cut your banking costs is to join the Federation of Small Businesses (FSB) and open a business account with Co-operative Bank. Membership of the FSB costs £120 a year (plus a £30 fee in the first year) but for that you get legal support, access to its pension scheme, discounts on a card payment system and legal protection insurance cover.

The Co-op offers free banking on deposits of up to £4,000 a month, up to 0.28 per cent interest, a fee-free overdraft and a £25-a-year bonus. So, for less than £8 a month you get all the benefits of the FSB plus a business bank account that pays interest.

What if I do business abroad?

If you receive or make payments abroad from your business account you could face hefty charges of up to £40 for each transaction, so make sure you check out the costs when choosing your account. TSB’s business account has one of the lowest international charges, costing just £10 if the payment is less than £5,000.

If you are going to make a lot of international transactions it may be worth opening a specific foreign currency account. With these you get the benefit of cheaper international payments, plus you can hold money in another currency to help you ride out exchange rate fluctuations.