Should I use an online bank account for my new business?

I have researched business bank accounts for a new nursery we are setting up for the local community. It is proving surprisingly difficult. Lloyds Bank is not accepting new business customers, HSBC doesn’t accept applications from limited companies unless they are owned by individuals and not an organisation. Nationwide does not offer a business current account as yet, and I have been on hold forever with Barclays.

The other option is to go with one of the newer, online outfits such as Starling, Tide or Cashplus. What are the pros and cons of going for a high street provider versus a newer bank?

Helen Saxon, banking editor at MoneySavingExpert.com, says that whether you opt for a high street name or a newer, online operator for your business account depends on what you want it to do and how you’re going to use it.

First, consider the fees. High street banks tend to give you 18 or 24 months with no monthly account fee at the start, but then they are usually around £5-£10 a month, plus more fees on top, for example, 70p per deposit/withdrawal and 30p per transfer.

Accounts from digital providers such as Tide and Starling tend to have fewer and lower fees. Neither charges a monthly fee, though you will pay more for cash withdrawals and deposits (often £1-£3 per deposit).

This brings me to whether you will be handling cash and cheques or receiving most or all of the money through transfers. If you use cash and cheques, you may be better off using a high street account with a branch nearby. The branchless digital banks tend only to let you deposit cash at a post office, and for the aforementioned fee.

If cash isn’t likely, but a few cheques are, Starling may work, as it allows you to take photos in-app of a few, small-value cheques per week (or permits you to post them if they’re higher value or more frequent). Tide, however, doesn’t currently allow cheques.

How do you want to manage your account? The online providers are app-based, with easy ways to attach receipts to transactions, seamless integration with bookkeeping software and other tools to help you budget, for example for tax and VAT. Some high street banks have this, but not all.

Also check if the provider allows you to borrow. You may need a loan to set up the business, or further down the line to expand it. Some of the digital account providers will not be able to help, and many high street banks only lend to their own business customers.

A final note on safety. Money held in bank accounts is covered by the Financial Services Compensation Scheme (FSCS), up to a limit of £85,000 per person, per financial institution. The FSCS protects some limited companies too.

High street banks and Starling have this protection. But Coconut, Tide and Cashplus are not, strictly speaking, banks. Instead, they partner with prepaid cards, and abide by e-money regulations. These require customers’ cash to be ringfenced. So if the provider or prepaid card company goes bust, your cash should be safe. The slight risk comes if the service with which your ringfenced money is stored in goes bust, because then your cash is not protected. So if you plan to hold large amounts of cash, you may feel safer with a bank.

Mike Cherry, national chairman at the Federation of Small Businesses, says one size rarely fits all. A question that a lot of new owners of small businesses ask themselves is: do I actually need a dedicated commercial account? While not every start-up technically does, it is best practice to have a business account as it will make tracking cash flow, reporting to HM Revenue & Customs and assessing the need for external finance much easier.

It is a shame to hear that you have found setting up an account a challenge to date, but it is best to persist. The Federation of Small Businesses is campaigning for meaningful change in this space — we need a genuinely competitive environment where banks actively seek out your custom. The FSB’s hope is that the rise of Open Banking — which makes it easier for you to share your financial data with other parties — will help drive this change.

Rather than thinking about high street providers versus newer entrants, start with your essential needs and consider different banks from there.

A key consideration is customer payments. If you envisage clients paying with cash or cheques, then you will need a bank with reasonable deposit and withdrawal charges.

Providers will usually charge a series of wider fees as well, so it is very important to be aware of these. The consumer group Which? has a useful breakdown of charges for different accounts. Another crucial resource is the Competition and Markets Authority’s survey of satisfaction with different providers.

As more people bank online, a lot of lenders now have a very diminished branch network or — in the case of the challengers you mention — none at all.

Where cash is concerned, if you like the look of a provider with a limited high street presence but you’re still keen to deposit and withdraw, you’ll probably have to access banking services through your local post office. You can have a look at the degree to which different business accounts can be accessed through the Post Office on its website. 

That lack of bank branch access has also meant a decline in access to in-person conversations with relationship managers. This support can be very useful — especially when it comes to discussing overdrafts, loans and commercial mortgages. If you feel that an in-person relationship will be important, you may be better off continuing your search at local branches. 

Another area to think about is how you see your account interacting with other tools that can assist your efficiency, particularly where accounting is concerned. The government is now bringing more businesses into the scope of Making Tax Digital — requiring businesses to submit returns through approved platforms such as Sage, QuickBooks and Xero. Even if you are not in scope for some time, you will probably want to ensure that the current account you choose is compatible with these platforms.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to [email protected].