What Type Of Bank Account Should You Open?

Understanding Different Account Types And When To Use Them

If you do not have a bank account, chances are that you will soon want to open one and may be weighing what type to operate. You may also have a personal account and may be wondering if there is need for a separate account for your business and if so, what type. Chances are too, that you may not know all the account types offered by banks and when it is beneficial to use each type. If you fall into any of these categories, this article may be useful to you, as it explains the options and suggests when each is appropriate.

You personal account, if you have one, can still be used for running your business. However, it's always a wise decision to separate your business from personal transactions. A separate account for the business will help track business expenditures and enforce some expenditure disciple that will ultimately pay you good dividend. To effect this, you may decide on a salary or allowance for yourself and once taken out, only business-related payments can go out of the business account.

So, what type of account should you open for your business? To help you make this decision, here are the features of the major account types:

1. Current Account
Businesses often want to run a current (chequing) account. A current account is designed to be a business account, hence the emphasis on account turnover. It is an account type which encourages you to pay in or withdraw money as frequently as you choose, even if several times in one day. No notice is required. You may choose to open the account in your name (called a personal current account) or in the name of your company, if registered (a corporate account).

As a chequing account, you are issued a cheque book when you open the account. That means you can issue a cheque in favour of yourself or another party to withdraw from the account. As the person issuing the cheque, you are called the drawer while the person in whose favour you draw the cheque is called the payee. You may issue the cheque as 'open', which means the payee can present it at the counter at your bank and get paid cash immediately. Today, most banks run networked online branches, with the effect that the payee can actually present the cheque at any of the bank's branches and still be paid cash. If you choose to issue the cheque as 'crossed', the implication is that the payee must pay the cheque into into a current account in a bank (which may be a different bank from yours). The person or company will not be able to collect cash at the counter, but will get paid through the Clearing System, operated by the banks, under the auspices of the Central Bank.

You can also pay cheques you receive from your customers into your current account for clearing. If you pay cheques into the account, it is the responsibility of your banker to clear the cheques for credit to your account or to inform you if, for any reason, they are returned unpaid.

Requirements
Opening a current account is generally easy, especially as banks continue to simplify the process. However, certain information and documentations will be insisted on to meet regulatory and relationship management requirements. These include

• a few basic forms to capture personal or company information;
• identification (driver's license, international passport or any other ID acceptable to the bank) for the account signatories;
• passport photographs of signatories;
• certified copies of company registration certificate and form Co7 (originals for sighting);
• References (usually two referees who must satisfactorily operate current account in a bank). For a corporate account, corporate referees are required.

Benefits

• Flexible to operate - you can pay in and withdraw as frequently as you need to;
• Is a chequing account: you're able to issue cheques and avoid the risks and costs of excessive cash transactions;
• You can lodge cheques for clearing, meaning you can equally receive cheques from your customers;
• You may enjoy a clearing gap when you pay by a cheque. The cheque may not come into your account immediately which may be beneficial for your cash flow management;
• You can receive references from the bank to third parties
• You may borrow on this account and receive a range of ancillary services.

Disadvantages

• Usually, you are charged monthly commission on the debit turnover on the account and this could be a sizeable amount if the account is very active. However, not that some banks now offer COT-free accounts.
• Interest is not usually paid on current account balances. If credit balances are high, this could mean substantial loss of earnings unless you take extra steps to invest short-term balances.

2. Savings Account
You can use a savings account for your business either exclusively (especially if withdrawals are infrequent) or to support a current account. A savings account is designed for building up savings and is interest-bearing. Like the current account, it has no time limit and can receive receive additional deposits as often as you choose. You can also always withdraw, though frequent withdrawals may deny you interest payment.

Usually, no cheque book is issued on such account, though some banks now have special savings accounts that may allow issuance of cheques payable within the bank's branch network. They may also accept lodgment of cheques under some conditions.

Requirements

• Identification (international passport, driver's license)
• passport photographs
• Account opening amount, which is usually low

Advantages

• Easy to open with minimal requirements
• Encourages savings and accumulation of reserves
• Pays interest on account balances
• No commission is charged

Disadvantages

• Usually no cheque book, so you cannot issue cheques. Even in the hybrid cases, cheques issued can only be used within the same bank.
• Basic savings accounts require personal withdrawals which denies the flexibility of sending an assistant.
• Every transaction is in cash and immediate unlike with cheques where it may take some time before the cheque you issue is presented and paid.

3. Call Account
This is a deposit account which may be withdrawn at short notice, unlike a term deposit that has a fixed tenor. A call deposit account is used in setting aside an amount that may not be immediately required for operational purposes, though that need is likely to arise any time. In that case, the amount earns some interest in the call account, while it can still be withdrawal at short notice, if the need for it arises.

Advantages

• It earns interest, usually at a rate above the savings rate.
• Provides flexibility as it can be drawn on if the need suddenly arises.
• Is a good tool for cash flow management, allowing you to optimise returns on you short-term balances.

Disadvantages

• Not an operating account, so you cannot easily run your business exclusively on a call account.
• It is not a chequing account; if you must write cheques you need a current account.
• Usually, very small amounts may not be accepted as call deposit, unlike a savings account where you can deposit very tiny sums.

4. Fixed Deposit Account
This is a time deposit, meaning that it is fixed for a specified period of time, say 30, 90 or 180days. Interest is paid on the deposit at a rate agreed with the bank at the commencement of the deposit. When the deposit matures (that is, when it is due), you may choose to withdraw it or roll it over (renew it) for another stated tenor. You are not expected to withdraw your fixed deposit before the maturity date, though in exceptional circumstances your bank may oblige you, usually at a cost.

Advantages

• It helps you accumulate reserves by enabling you 'lock up' amounts you may not want to spend at the moment.
• It provides a relatively safe investment outlet as you earn fairly good returns for keeping your funds in a fixed deposit.
• It is a liquid investment and helps in balancing your investment portfolio such that you have investment you can quickly realise in emergency without any major loss of value.

Disadvantages

• Interest rate may lag behind inflation rate, meaning that the real value is depreciating; it's therefore not a good shield against inflation.
• As an investment, it's of a fixed income nature and does not provide any opportunity to enjoy capital appreciation as is possible with stocks and real estate.

5. Special Accounts
Banks often develop special products targeted at specific members of the public and loaded with features that should appeal to that segment of the market. Usually, it is the basic account types already listed above that are repackaged to give a special flavour, with a unique name. Diamond Bank, for instance, has a DISA Account which is a savings account with hybrid features: a cheque book to run the account, lodgment of clearing cheques into the account, zero COT, etc. You may therefore be interested in finding out what special accounts the bank you're approaching might have. Who knows, the features may appeal to you more than the standard accounts.

Which Way To Go?
Banks continue to create products which may include variants of the above account types. Basically, however, they will revolve around these listed ones. When you decide to open an account, you can now choose what best suits your purpose. Always remember that the banks are there to provide all the guidance you need. If you'd prefer an independent opinion, you can also seek out a financial adviser.

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