Pros and cons of a business savings account

If you run a business, stashing any spare cash into a savings account can help you build a financial safety net to fall back on in an emergency or to help expand your business.

But it’s important to understand what you’re signing up for before you apply, including potential drawbacks. 

Key takeaways

• Earn interest on spare business cash - helping your money grow while it’s not in use

• It’s a simple way to set money aside for things like tax bills or future expenses

• Some accounts limit access, so you may need to wait or give notice before you can withdraw funds

• Interest rates and terms vary so it’s worth comparing options to find one that fits your business's cash flow needs

What is a business savings account?

A business savings account is an account you can use to deposit any surplus cash your business has.

You shouldn’t use your business savings account for everyday transactions, but to put money aside that you want to save. Your saving goals will be unique to your business, but could include saving for a tax bill, buying new equipment or building a rainy-day fund.

Unlike most business bank accounts, you earn interest on the funds paid into a business savings account. This helps your savings pot to grow over time.

Benefits of a business savings account

Business savings accounts offer the following benefits:

• Interest on savings: You can earn interest on any cash you don’t need for day-to-day operating expenses, helping your savings to grow.

• Financial safety net: You have a savings pot to fall back on in case of unexpected expenses or if sales suddenly drop.

• FSCS protection: The FSCS protects business savings deposits of up to £120,000 per financial institution. This means your money is safe if your bank goes bust.

• Flexibility: You can choose from a range of business savings accounts. Some offer instant access to your money, while others let you lock away a lump sum for a set time in return for a higher interest rate. 

• Separate business finances: If you’re a limited company, you’re legally required to keep your business and personal finances separate. Sole traders don’t need to do this by law, but a separate account can make it much easier to complete tax returns and stay on top of your finances. 

💡 Editor insight: How business savings accounts can help SMEs to grow

Limitations of a business savings account

Business savings accounts also have a few drawbacks.

• Variable interest rates: Some business savings accounts – usually easy-access ones - pay a variable rate of interest. This means it can go up or down at any time and can impact your overall earnings.

• Withdrawal penalties: Fixed-term and notice business savings accounts can charge penalties if you withdraw funds during the account term or without giving sufficient notice. 

• Bonus rates: Some easy-access accounts pay a bonus rate that temporarily boosts the overall interest rate. Typically, the bonus expires after 12 months and the rate drops, meaning you need to move your money to another account if you want the best rate.

• Minimum deposits: Each provider sets a minimum deposit amount. You need to be sure you can meet this requirement before opening the account. Also, find out if you need to maintain a certain balance. Failure to comply with this requirement could result in the provider closing the account or cutting the interest rate. 

• Tax: Business savings accounts pay interest gross (without tax deducted), so you need to pay tax on the interest earned. The amount you need to pay depends on whether you’re a sole trader or a limited company and how much you've earned across the year.

Should you have a business savings account or can you use a personal savings account? 

You don’t have to open a business savings account, but it can be beneficial to do so.

It’s generally a good idea to have a cash reserve to support your business for at least three months if your sales suddenly drop or you’re unable to trade for some reason. 

If you run a limited company, you can’t use a personal savings account for your company savings as your business is classed as a separate legal entity. This means if you want to open a savings account for your company, it must be a business savings account. 

If you operate as a sole trader, you could use a personal savings account instead of a business one. But a separate business savings account makes it easier to manage your finances, calculate tax bills and keep track of your expenses. 

How to choose the best business savings account

When comparing business savings accounts, think about the following points:

• Interest rates: You ideally want to look for the account with the highest interest rate, but don’t forget to also check whether the account offers a variable or fixed rate 

• Accessibility: You need to consider whether you need regular access to your savings or whether you can afford to tie up a lump sum for a set term 

• Account management: Think about whether you’re happy managing your savings account online or whether you’d prefer to have telephone banking or a local bank branch

• Minimum deposits: Check how much you need to deposit to open the account and whether it is affordable. Also, find out whether you need to keep a minimum balance in the account

• Eligibility criteria: Finally, make sure you qualify for the account – otherwise there’s no point applying for it. Some accounts require your business to be a certain size or have a certain annual turnover

In conclusion

A business savings account can be a useful way to grow spare cash and set money aside for future costs, but it won’t suit every business. If you need regular access to your funds, the limits on some accounts could be a drawback.

Weigh up how often you need access to the money, how long you can leave it untouched and whether the interest on offer makes it worthwhile before deciding if it’s the right fit for you.