Holvi Blog for Makers and Doers

7 reasons for sole traders to open a separate business account

Entrepreneurship, Tips for small businesses · 07/02/20 14:58 · Daniel McLeod

Business account for sole traders

Business account – yes or no? You’ve launched your freelance career, set up as a sole trader and now you’re seeing (or maybe just foreseeing) transactions piling up in your personal account.

A quick online search confirms the legal requirements: as a sole trader, you don’t need to open a separate business account. But… should you?

Absolutely. Here’s why.

 

1. Clean, accurate bookkeeping for sole traders

As a sole trader, opening a business account helps you keep track of your transactions, so that when tax season rolls around everything is clear and orderly.

“£22.40 to Café Savannah on 24 September 2019... Was that a business lunch or a personal one?”

Look for a smart business account that works for you. Lots of non-traditional (i.e., non-high street) banks offer features aimed at streamlining sole traders’ bookkeeping. Features like:

  • Auto categories that filter expenses into relevant categories, helping you keep track of what money goes where
  • Snap, sort and store receipts to remind you via push notification to take a photo or screenshot of your receipt and attach it to your transaction instantly

For tax reasons, you’ll need to keep a record of every expense you claim, along with any info needed to work out the amount for your end-of-year self-assessment. After it’s all done, HMRC requires sole traders to hold on to these records for 3 years, so storing your receipts digitally is the best solution. If you need further motivation, check out our post on how one small business owner finally said farewell to the shoebox!

 

2. Track ins and outs easily in a business account

Keep an accurate view of your cash flow at all times. Opening a separate business account guarantees a clearer overview of your business finances – and by extension your personal finances. This helps you avoid overspending, especially in the early stages when you’re just setting up.

Pro tip: Holvi’s dashboard visualises your ins and outs in real time, and shows projections based on scheduled payments (like invoices due and payments out) – so you can gain an instant understanding of your cash flow.

 

3. Know when you’re paid – easy invoicing and other tools

Tired of compulsively checking your phone to see if that invoice has been paid? Holvi’s business accounts feature a handy invoicing tool designed to make sole traders’ lives easier. This lets you create and send invoices with just a few clicks – or taps, if you’re using our mobile app. You’ll get push notifications telling you the second an invoice has been paid, providing instant relief – and letting you forget about that contract and client, for a little while at least.

You’ll receive push notifications for all other ins and outs via the Holvi app too. In today’s world, it’s all about staying updated. No matter where you are, your business stays with you – so should your business account.

But sometimes separation is needed. Maintaining a work-life balance is important (see below). You can turn off push notifications whenever you like.

 

4. A separate business account helps you stay compliant

As a sole trader, you’ll need to complete a self-assessment at the end of each tax year. But… even if you do everything right, HMRC can still audit your business. Separating your finances in a business account can help you here. 

Here’s an easy equation to break it down:

          You open a business bank account

      +  You use your business account payment card for expenses

      +  You snap and store a photo of the receipt, and tag it with relevant details

      =  All your ins and outs are clearly visible in one account, saved and sorted

 

Not only will this help you avoid inconsistencies – a main cause of audits in the UK – it’ll ease the process in the unlikely event that your business pops up in HMRC’s random number generator. This can potentially save you days of stress.

 

5. Your bank might force you to open a separate business account

Check your bank’s T&Cs – sorry, you might need to pull out the magnifying glass. Most banks prohibit using your personal account for business purposes. In this case, they might try to switch you over to a business account, typically with a temporary free trial period (but ultimately a paid account).

You should avoid automatically doing your business banking with your personal bank. Instead, do some research and consider your options. Finding a service that best suits your needs can save you time and money.

 

6. Look accountable – prove your business isn’t a hobby

When you send an invoice from your business account, it sends an official message to your clients. Here’s what they read, between the lines and figures:

“This person is a professional.”

Sometimes, at the start, sole traders can get carried away in the dream of a new, employerless lifestyle. It’s easy to lose track of reality: cash flow – bills due, chasing invoices. Opening a business bank account is one tangible way to constantly remind yourself that your freelance lifestyle is a real business venture.

 

7. Create a work life balance – separate business and personal

And on that psychological note, separating your business and personal finances signals to you that these are two distinct parts of your life. You have your personal life and your sole trader life –  and these should, for your sanity and productivity, be kept separate. Yes, there will be days (or sometimes weeks) when urgent business consumes most of your time. This might be feasible when you’re just starting out, but you’ll want to move away from this as your small business grows and becomes stable.

 

To sum up

Most UK sole traders use their personal accounts to run their business (the most recent stats say 70%). After all, you can do it. But the industry’s high churn rate serves as a reality check to new self-starters. It shows that sole traders need more support in making their small businesses financially successful in the long run. And this is the gap Holvi aims to fill.

Think about the time and energy that separating your finances will save you – both now and down the line when it’s time for taxes. Then think back to these 7 factors, and ask yourself the question:

‘Would I benefit from opening a separate business account?’

If the answer is yes, we hope you’ll consider Holvi.

Always curious? Sign up to Holvi’s blog for makers and doers.

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