Fees rise if you're freelance

Conventional wisdom says that anyone planning to set up in business should start with their bank - to get the benefit of its small business expertise. Yet for some self-employed people, the best advice is to keep mum. Wait for your bank to find out.

The problem is that once you are self-employed, you are a business. And if you are a business, banks tend to insist you have a business bank account, which means more expense than using your personal current account. As the table below shows, most business accounts carry flat monthly/quarterly charges as well as charges for each transaction. That may seem fair; if you are writing lots of cheques for expenses and paying in lots of cheques and cash, there is more cost to the bank. But what if you have become a freelance consultant and, instead of one salary credit each month, you make just a few more credit transactions as you are paid for your work? Why should you pay more?

Ask the banks and they will say you must have a business account - not because it is a legal necessity but because they insist.

"We have two ways of monitoring people's activities through their personal account," says Claire Martin of National Westminster. "First of all, if they are actually coming into a branch and paying sums across the counter, our cashiers pick out that these are business not personal transactions. And internally we monitor when accounts have higher than normal levels of activity and we can pinpoint them."

Ultimately, people could be asked to open a business account or take their personal account elsewhere. But some banks admit this may depend on the level of activity. "If someone pays in a few cheques once or twice a month, there is no major cash handling, and turnover is not astronomic, it would probably pass unnoticed," says Mike Conroy of Midland Bank.

Even if business transactions are spotted, there may be room to negotiate, he says. Banks are mindful of relationships - in particular if someone has, say, a mortgage, insurance or investment account with them. "Officially you are either a personal or business customer, but managers are empowered to make commercial decisions. A manager might decide to allow a self- employed person to carry on using a personal account."

If you cannot get what you want, it may be best to move your money. Building societies may happily allow the self-employed to use a personal account as they do not usually run separate business accounts.

That said, the banks are keen to highlight the benefits of being a business customer. "What someone requires now may not be what they require in future. By building up a relationship and a track record on the business side, they will be in a better position if they need help in the future," says Neil Denton of TSB. "And you have to remember that lending on the business side is usually cheaper than personal lending."

"If you want to borrow [for your business], get advice and build up a track record; you can't do this as a personal customer. And you would not have a business manager to talk through any problems," Ms Martin says.

It's all about that banking buzzword: relationship. But some people do not really want a relationship. "Bank charges for business customers are all based on the fact that, at some time in your life, you are going to need the relationship management you get from a bank manager when you are doing a sophisticated deal," says Dave Smith of the Co-operative Bank. "You may be paying for something you don't want."

If you can do without a relationship and do not want overdrafts and loans, the Co-op's Business Direct phone service could be cheaper, though still not as cheap as a personal account.

There are, however, practical reasons why some self-employed people may prefer a separate business account. Accountants and most financial advisers would say it is important for tax and VAT purposes to keep personal and business payments apart. It can be difficult to work out how much money is going through the business if everything is in one account.

Banks seem keen to get a slice of the small business action. NatWest has 4,000 business advisers throughout the country. You can pick up its guide to starting a business and arrange a preliminary chat without charge or commitment. Other banks are similarly obliging.

`Business MoneyFacts' is a monthly guide to bank accounts, overdrafts, loans, commercial mortgages and so on. For a free copy, ring 01692 500765.

Business bank accounts

Credit Cheque Cash Periodic Debit Credit interest card card charge charge charge Bank of Scotland no no no nil 32p* or 48p 32p* or 48p Barclays no no yes pounds 2.50 mth 64p 64p Clydesdale no yes yes nil 32p or 50p 32p or 50p Co-op yes yes yes nil 18p or 50p nil A&L Girobank no yes yes pounds 1.75 mth 65p 65p Lloyds no no. no pounds 2.50 mth 63p 63p Midland no yes yes pounds 2.50 mth 35p or 60p 35p or 60p NatWest no yes yes pounds 2.50 mth 40p or 67p 40p or 67p Royal Bank no yes yes pounds 10 qtr 45p to 55p 25p to 70p of Scotland

TSB yes yes yes pounds 7 qtr 66p 66p

There is usually a range of hefty charges for duplicate statements, stopping cheques etc. *Lower charges typically relate to electronic transactions, rather than cheque-based payments, for example. Source: MoneyFacts.