Loans Using Bank Statements
If anyone has tried to learn a new hobby, activity, or sport, then they know the importance of learning good habits right at the beginning. Take skiing or snowboarding for example – if you learn bad habits early on then you will never be able to ride down black diamonds without injuring yourself. So why would it be any different for running a company? Whether your business is already well established, is a small business, or has just started out, learning to separate your business finances from your personal finances is an essential business practice that every single business owner should be learning how to deal with early on.
When it comes to setting up a business bank account, you must decide what type of company your business will be classified as – sole proprietorship, limited liability company, a corporation, and so forth. Without making a distinct classification, your business will not be able to set up a different account separate from your personal financial accounts. The requirements needed to set up a business bank account vary depending on what type of business you are running. With a sole proprietorship, there is much less documentation needed. All you really need is your social security number and a DBA. A DBA stands for “doing business as…” which basically gives your business a legal way to operate a business under a different name than your own. As you probably know from our previous blog outlining sole proprietorships, all of your assets, both personal and business, will be in jeopardy if you were to be sued, but as mentioned above, starting with good business practices is essential for any business to succeed. So if you decide to change your sole proprietorship to a limited liability company or a corporation in the future, you will have this invaluable skill under your belt already!
If your business is under a different classification, you are required to have the company’s EIN, otherwise known as the business’s federal tax ID, the “Articles of Organization”, and the operating agreement (if your business has one). An EIN is provided to your business from the Internal Revenue Service and is the most essential piece of documentation when applying for a business bank account. The articles of organization is a form that comes from the Secretary of State that is signed and stamped; this form proves that you are a corporation or limited liability company. If the operating agreement pertains to your business, then you will know it is basically a formal statement about your company and its members.
Ins and Outs of Business Bank Accounts
All in all, setting up a business bank account is a fairly simple process, but with all the fees and taxes associated with opening business bank accounts, what are the benefits of a business bank account instead of putting all of the money generated by your business into your personal bank account?
- Corporate Veil and Legal Protection: While this does not really apply to a business classified as a sole proprietorship (because a sole proprietorship will have all assets hanging in the balance when being sued), it is still a great habit to form when your business does expand into a limited liability company or corporation. For a limited liability company or corporation though, separating your personal and business finances is essential. If your business is being sued for whatever reason or cannot afford to pay its debts, having a separate bank account for your business from your personal finances will create what is known as a corporate veil. This will shield your personal assets during these rough times. In addition to protecting finances, having a separate business bank account also allows your business to keep personal liability protection. This basically means keeping your business as its own entity and separate from you and your personal assets. If your business is ever sued, showing that you have maintained your limited liability company or corporation is essential because the corporate veil can be pierced through this technicality, leaving your personal assets at risk.
- Tax Time and a Clear Audit Trail: Having a combined personal and business bank account is incredibly messy – especially when tax season comes around. Having to separate all of those transactions from business and personal transactions is not easy and is incredibly time consuming. This also allows your business to have a clear trail of your business related financial transactions in case your business is ever audited by the Internal Revenue Service. Remember, it is not a legal requirement for a business to combine personal and business bank accounts, so long as your record are accurate, complete, permanent, and show a clear record of income and deductions – but go ahead a try separating all of those transactions from personal transactions while providing a clear audit trail!
- Legitimacy and Professionalism: Once again, this is not a requirement by any means for a business owner, but having a separate business bank account with your business name on it will look much better when writing checks or having a check written to your business. Unfortunately, people do judge by a cover, so if your business does not look or seem professional, then why would a person continue doing business with you? While this probably will not be a deal breaker for clients, it will send the right signals as you expand your business.
- Business Deduction Rule: The law states that only businesses can deduct business expenses. What this means for all business owners is that if you are trying to write off transactions and expenses on your taxes that are linked to your personal bank account, you will have a hard time showing the government that you are running a legitimate business instead of just a hobby or side project.
- Missed Deductions/Write Offs: This is a pretty obvious reason to open a business bank account and separate your personal finances from your business finances. Seriously, why take the chance on missing a write off for your business simply because you did not want to take the time to set up a business bank account?
- Debit Card and Credit Card Processing: As you already know, being able to accept debit and credit cards in your business is essential today because most people, especially younger generations, do not even carry cash with them anymore. If your business does not allow credit and debit card processing, it will seriously hurt your businesses’ profitability. However, to set up a merchant account to allow credit and debit card processing, your business needs a business bank account!
- Build Business Credit/Business Credit Card/Financing Possibilities: One of the most important aspects of setting up a business bank account is the development of a relationship with a bank (and/or banker). Setting up a business bank account opens the door to many possibilities with that bank, such as mobile banking options and offers for business credit cards. This can then lead to building business credit, which in turn can lead to many different finance options when your business needs them (or even business lines of credit!).
What is a Bank Account Loan?
A bank account business loan isn’t really a loan as much as its the sale of your company’s future bank deposits at a discount to the lender. Funding is almost solely based on your company’s bank account cash-flow. The lender will look at your business bank account, do calculations using the bank account’s total deposits, number of deposits, average daily balance and other factors to determine exactly how much funding you would qualify for. A bank account business lender can provide up to $500,000 based almost solely on the financial activity of a company’s bank statements.
A lender will usually provide between 10-20% of a company’s annual bank deposits based on the past 3-6 months of the bank accounts cash-flow (and other credit criteria). While credit is used in determining approvals for a bank account business loan, the requirements aren’t too strict, allowing business owners with bad credit to obtain financing. The approval process usually takes a matter of hours, and funding can be as quick as 24 hours.
How To Get a Bank Account Loan?
1. Basic Credit Application
All business owners with more than 20% ownership will have to complete a credit application
2. Supply 6 Months Bank Statements
The lender will analyze your bank statements and decide the appropriate amount of funding along with rates and terms
3. Receive Cash Advance Offer
The Bank Account Cash Advance lender will provide the business with the offer, and provide a list of stipulations that must be provided before funding.
4. Get Funded
Once the contract and stipulations are provided, the lender will then move forward and wire the funding directly into the business account
