How to choose and why research is important
Although you may already have banking accounts for your own personal banking, if you’re registered as a business it may be necessary to upgrade your banking, or separate your personal and business banking. The reason for this could be either that it’s a business requirement to have separate and specific financial structure for your business, or that you simply have different needs as a business. If you are a sole trader, you may also want to ensure you are getting the most competitive banking option personally and professionally.
When deciding on where you should bank, there are a number of considerations you should make:
Interest Rates
Interest can affect your finances in two separate ways: it can increase or decrease your money.
Earning Interest: with a Savings account, you want to try and secure a high interest rate, as this will lead to a higher amount of bonus money entering your account every month. Most accounts will vary between 0.1% and 3%. Higher interest savings accounts will require you to either deposit a certain amount of savings per month, or have an attached transaction account you use a certain number of times each month. Ensure you research savings and transaction accounts to not only secure the highest interests option, but also ensure you understand the conditions of your interest.
Paying Interest: Interest can also be applied to Credit cards and bank loans. The way this works, is that every month you will be required to make minimum repayments onto your credit card or loan to pay back the money you have borrowed from the bank. Interest can be attached to these repayments, increasing the value you have to pay to pay back the money you owe. Interest rates can vary anywhere from 12% to 25% depending on the institution you bank with/borrow from. If you deem it essential to borrow money, it’s highly valuable to research how the interest rate will affect you.
Do I need to borrow? Do I require credit?
Borrowing money via a Personal/Business/Bank Loan or a Credit Card is known broadly as “line of credit”. This is something that can support a business without a high amount of capital (existing funds) to use on resources, marketing, production and more. A Loan or Credit card has to be paid back to the institution which you borrowed from. The amount you pay back can be impacted by the interest rate which you are charged, and potentially promotions such as “12 months interest free” where you pay a set amount back for a period of 12 months, and then you begin paying interest on top of this.
It’s important to be able to identify credit, understand if you need it and how to use it, and the impacts it has on you personally and professionally. As a sole trader (working for yourself), this can impact your own credit history, and may lead to debt you’re personally liable for. Depending on your business structure, business owners can also be impacted by poor credit history and debts from their business.
Visit our Business Registration page to learn more about the different business structures.
Other more modern ‘lines of credit’ include pay-in-four/buy now, pay later or “flexible payment” options: these services allow you a smaller line of credit (with or without interest, this varies) where you can take time to make payments but still receive goods/services. In many cases these services allow a more accessible approach to banking by allowing flexibility without interest/account fees.
However, it’s important to note that what these services are providing is still a ‘line of credit‘ which can impact business’ and individuals credit history, perceived financial risk or future borrowing power.
Fees
Fees are monthly, annual and/or ad hoc payments you may or may not be required to pay to have accounts with financial institutions: some banks will charge a monthly or annual fee simply for having the account open, however there are many that do not. There are also penalty fees that may be associated with different accounts, such as:
If you put your savings or transaction account into negative money (EG: -$10), your bank may charge you a fee
With lines of credit (loans, credit cards, flexible payment schemes, etc) you may also incur late fees for not paying on time, which can eventuate to other penalties if repayments and fees are not paid. It is important to keep an eye on your accounts and ensure there are sufficient funds, and that you’re aware of upcoming fees/repayments. Researching financial institutions before opening accounts will help you avoid as many fees as possible.
Other things you may want to ask yourself before settling on a bank/financial institution include:
- Do I want or need the ability to write cheques?
- What is this bank’s online banking like?
- Do I need to be able to transfer money/use phone and online banking?
Find a resource to start comparing banks here.