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  • Gary Smith
  • October 29, 2020
  • 4 min read

Traditional or digital banks: which are best for your small business?

Opening a small business account used to mean taking your pick from just half a dozen or so high street banks. But these days, alongside the old familiar names, you’ll find a growing list of challenger banks and ‘fintech’ alternatives vying for your custom.

New kids on the (virtual) block include the likes of Starling, Monzo, Revolut and Tide. Offerings vary, but they tend to have certain features in common: things like swish, user-friendly apps, a streamlined sign-up process and easy integration with your accountancy software.

So is online-only banking the way forward, or is it safer to stick with bricks and mortar branches? As you weigh up your options, here’s what you should be aware of.


First things first: is my money safe?

Small businesses get the same level of protection as individuals Under the Financial Services Compensation Scheme (FSCS). It means that if a UK-authorised bank fails, depositors are compensated for their balance, up to a maximum of £85,000.

FSCS-wise, with the traditional high street banks, you know exactly where you stand. With the newer online-only providers, the level and type of protection offered can vary. For instance, Starling and Monzo are UK-authorised banks, thereby affording you the same failsafe protection as the likes of HSBC or Ulster Bank.

Other institutions are actually banking services providers rather than fully-fledged banks, which basically means they park your money elsewhere. With Revolut, for instance, customer money resides in UK banks, so you still get FSCS protection – albeit indirectly.

A couple of tips here:

  • Where direct FSCS protection does not apply, look carefully at the deposit protection safeguards in place to make sure you are comfortable with them. If it seems convoluted or vague, proceed with extreme caution.
  • Remember, the cap on FSCS protection is £85,000 per-depositor. If your balance regularly exceeds this, you might take the view that a more established institution is a safer option for your money than a smaller, recently-authorised bank.

Sign-up process

Traditional banks don’t always make the application process easy. And when the business landscape looks ominous, it’s not unknown for these institutions to call a temporary moratorium on new business customers.

As just a couple of examples, Lloyds Bank website states that they are not currently accepting new business account applications while they deal with a backlog of COVID-related work. Meanwhile, Barclays says that it’s getting a lot of applications at present, so it’s taking around six weeks to process them.

Digital account providers tend to promise a faster, pain-free online application process. Typically, you’ll be asked to scan and upload proof of ID. You’ll probably be also asked to scan through items such as invoices or recent accounts to help verify the nature of your business. The good news is that you’re usually spared the detailed examination of your business plan and accounts that high street banks sometimes insist on.

Credit rating checks

A bad, poor or no credit rating can make it nigh on impossible to open a business account with a traditional bank.

The approach of digital providers varies. Fully-fledged online banks (e.g. Starling and Monzo) do carry out credit checks. This means that if there’s an issue with your rating, you’re likely to get a strict ‘computer says no’ response (and unfortunately, with no option of popping along to a branch to explain a minor discrepancy).

Platforms such as Tide and Cashplus take a different approach. With Tide for instance, there are no credit checks. You provide proof of ID and confirm the nature of your business and the account can be opened in less than five minutes.

On the flipside, you’ll tend to find that if a platform does not check your credit history, it’s because it doesn’t offer the type of credit facilities you’d get from a fully-fledged bank (e.g. overdrafts and loans).

Fee structure

High street banks tend to give you a period of between 12 and 24 months without a monthly account fee. After that, small businesses can expect to pay around £6 per-month.

Very few challenger banks and fintechs charge a monthly fee for their basic account, although many offer premium functions at additional cost (e.g. with Starling, you can get the sole trader bookkeeping toolkit for £7 per month).

Just be aware that where there’s no monthly fee, you’re more likely to be charged more (or face restrictions on) certain categories of transactions. Obviously, with any account, it’s a matter of taking into account what type of transactions your business handles, and checking the bank’s terms & conditions.

Areas to pay particular attention to here include the following:

  • Cash and cheque deposits. In fact some fintechs, (e.g. Revolut) don’t take cash or cheque deposits. Others (e.g. Monzo) put strict limits on how much you can deposit in cash over a given period.
  • UK and overseas transfer costs.
  • ATM withdrawal fees.
  • Overdraft charges.

Choosing the right account

To help you decide what type of account might work best for you, let’s take three scenarios:

The consultancy business – You handle several large client payments a month that are all sent by bank transfer. Now that you’ve set up a limited company, you’re looking for a dedicated business account, without a long-winded application process. In this scenario, one of the challenger banks may make perfect sense.

The entrepreneur with a difficult credit history – You want a no-frills account for your new venture, but your credit history means you keep getting rejected by both online and traditional banks. So long as you will not be dealing with cash deposits, you may want to explore fintech banking alternatives such as Tide and Revolut.

The construction company – A fair proportion of your customers still prefer to pay via cash or cheque. And every now and again, you find yourself having to rely on a fairly substantial overdraft facility to bridge the purchase of supplies and receipt of customer payment. A bricks-and-mortar bank probably remains your best option.

Making life easier

Up until recently, tech integration was one area where the challenger banks tended to have a big advantage over the high street. They were ahead of the curve when it came to connecting your bank account to accounting software packages such as FreeAgent and Xero.

These days though, thanks to the recent Open Banking rules, virtually all institutions offer this feature. To discover more about the benefits of online accounting, and for expert help on making the switch, speak to MJH Accountancy today.

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