Every dollar matters for startups.
It's what allows creative ideas to transform from concept to reality.
Unfortunately, it's also the leading cause of failure, as shown by statistics.
For instance, a 2021 CB Insights report on 111 startups revealed that 38% failed due to insufficient funds.
A more recent statistic by Failory based on interviews with over 80 startups also indicates that 16% failed due to financial issues.
Skip to:
- 3 Key Reasons Startups Need Multiple Bank Accounts
- How a Startup Can Use Multiple Accounts Effectively
- Strategies to Minimize Fees When Using Multiple Bank Accounts
To avoid such problems, it’s best to have the right banking strategies in place early on.
A business account is initially essential, as it separates personal and business finances, aids in bookkeeping and cash flow management, and builds credibility.
Taking it a step further, maintaining multiple business bank accounts can be an even smarter move.
This article explains why startups should consider having more than one business bank account, how to use it effectively, and tips on reducing fees while keeping several accounts.
3 Key Reasons Startups Need Multiple Business Bank Accounts
Here are three primary reasons why having multiple business bank accounts is essential:
1. Enhanced financial transparency
If you use one account for all your transactions, you'll likely be sifting through months of transaction records to identify deductible expenses and income sources.
Alternatively, with multiple business accounts, you can segregate funds for operating expenses, payroll, savings, and capital raises.
This enhances financial transparency, which benefits startups in several areas, including:
- Improved budget planning through a clearer picture of cash flow patterns. The faster you can see where money comes from and goes, the quicker you can see expenses you can cut.
- Startup founders often overvalue their business ideas, sometimes by as high as 255%. That said, the more accurate the financial records, the more realistic the startup valuation. This also helps businesses make informed decisions regarding growth strategies.
- Streamline tax matters, considering diverse tax obligations such as income tax, sales tax, or payroll tax.
- Transparent record-keeping may enhance a startup’s chances of getting a loan or attracting investments.
- The sales stream is one aspect of product-market fit indicators. If you have multiple products and utilize different accounts, you may be able to achieve a better, easier, and quicker assessment of the profitability of specific products or services.
Moreover, for international startups dealing with multiple currencies, having only one single-currency account can be challenging due to exchange rate fluctuations.
To optimize funds management and profits, consider opening multiple business accounts for different currencies or a multi-currency account.
2. Better cash flow for uninterrupted operations
You may wake up to a frozen business account for several reasons and possibilities.
This might be because you made large purchases that differed from your usual spending patterns, engaged in transfers to or from foreign accounts, completed transactions from unfamiliar locations, or even simply experienced system glitches.
Resolving this type of issue with the bank can be uncertain and time-consuming.
The time it takes to unfreeze accounts varies; on average, it takes a few days, and in more complicated cases, it can even take over a week or months.
That said, having only one account can result in cash flow issues or disruptions to your operations.
For instance, being unable to access funds may cause you to miss a payment with your international suppliers or partners.
This can result in additional delays before suppliers resume shipping. In today's fast-paced market climate, you want to optimize your supply chain rather than experience such delays.
Spreading your funds across multiple accounts ensures uninterrupted operations because you can access funds from other accounts if one account encounters problems.
3. Diversifying risks
47% of financial data breaches were aimed at banks, and the financial industry experienced the highest number of data breaches in 2023.
Relying solely on a single business account poses risks if the account were to be breached or frauded, or in rare instances, faced with bank failures.
These risks are reduced by diversifying across multiple accounts at different banks. This approach ensures that company funds are not concentrated in one vulnerable access point.
Moreover, spreading finances across various start-up business bank accounts increases the number of insured assets, thereby enhancing overall financial security.
How a Startup Can Use Multiple Accounts Effectively
For a startup operating with multiple bank accounts, effective management is crucial for financial health.
A disjointed approach can result in unnecessary fees and poor visibility into cash flows, which undermines the initial purpose of having multiple accounts.
In this section, we outline some key strategies for effective management.
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Define specific roles for each account
Before opening a new account, always ensure it serves a distinct purpose.
If there's no clear purpose, reconsider signing up.
Typical objectives of accounts include income collection, operation expenses, tax obligations, salary disbursements, and emergency funds.
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Track transactions
It's crucial to track the allocated dedicated funds for each account based on its defined purpose.
Accounting software like QuickBooks or Xero can greatly help streamline this process.
These tools often facilitate tracking and assigning transactions to specified accounts and expense categories, as well as providing insightful reports.
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Periodically review account access
If multiple people handle your business accounts, assign clear responsibilities and review the access periodically to boost security and prevent unauthorized activities.
Strategies to Minimize Fees When Using Multiple Business Bank Accounts
Some may hesitate to use multiple accounts due to potential costs; however, the benefits of utilizing various accounts often outweigh the expenses.
Nevertheless, exploring ways to minimize fees is wise, especially if you own a low-cost startup. Here are some strategies to help you save:
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Choosing the right financial institution
Examine the expenses of a bank or financial service provider, particularly account fees, monthly charges, and minimum balance conditions, to choose one that aligns with your business requirements.
Ensure that these expenses won't negatively impact your profits. Additionally, assess whether their offerings provide the benefits you need.
One tip worth considering is to consider online banks and neobanks. These often provide free business checking accounts with fewer fees and offer a cost-effective solution.
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Exploring fee waiver options
Many banks waive monthly service fees if certain conditions are met.
These conditions often include maintaining a minimum balance or using their business credit or debit card.
Understanding these requirements can help you avoid extra charges.
It's always good to contact your bank or financial institution directly to explore the possibility.
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Leveraging account features
Make use of account perks such as ATM fee reimbursements, high interest rates, and free checks.
Matching these features with your business needs can help you get the most out of your account while keeping costs low.
One strategy is to use an account with a lower minimum balance for your expense account while directing funds for long-term projects, goals, or emergency funds to a high-interest savings account with a higher minimum balance.
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Stay informed
Keeping track of important financial documents like bank statements, receipts, and invoices helps businesses understand how they use each account.
This helps decide whether the accounts are ultimately advantageous or costly.
Final Words
Managing multiple business bank accounts can offer startups crucial advantages in financial transparency, uninterrupted operations, and risk diversification.
This approach not only improves financial management and decision-making but also safeguards against operational hiccups and security breaches.
Selecting the right financial institutions, exploring fee waiver options, and effectively utilizing account features are crucial to further optimizing financial management with segregated business accounts.
