Money: If the bank says you're a business ...

FREE BANKING is still the order of the day on the high street - unless the bank decides you run a business. The banks' official line is that any people who work for themselves - even if it is just some freelance work aside from their main job - or own a company, however small, need a business account. And that means high charges.

According to figures from the Co-operative Bank, a simple current account can cost almost pounds 500 a year in charges at some banks, even if the business customer is in credit. A personal account at the same bank is likely to be free.

It is sorely tempting for the self-employed to pay cheques into a personal account and hope that the bank doesn't notice. There are no legal requirements to use a business account. The Inland Revenue, for example, insists only that the self-employed keep adequate records of their income and expenditure. The restrictions are imposed by the banks.

The banks admit that there are plenty of people who put their business earnings either through their normal current account or a savings account. They claim they have no figures, but with around 3.3 million people self- employed in the UK, the numbers may be quite significant. A deposit account with a few cheques in each month, and a few standing orders or direct debits, may well escape the bank manager's notice as long as they are payable to the account holder and not to a business name.

"We have no system in place that alerts us to this," says Sandra Paul, a business banking spokeswoman at NatWest. "All we say is if people are running a business and have cheques coming in, they should run it as a business account."

The banks claim their high charges - such as 65p to pay in a cheque or withdraw cash - are justified because of the extensive support they offer businesses. NatWest, which is the largest bank for small firms in the UK, has a computer system that generates fact sheets on each particular type of business for its managers so they can offer tailored advice. Its business specialists also go through a training scheme accredited by Durham University's business school.

The banks describe this as "relationship building". They are quick to point out that a close relationship with the bank comes into its own if a business needs to borrow money or set up additional facilities such as a payroll system. But for thousands of the self-employed, these are facilities they may never need.

Businesses that require special banking functions, including paying in large amounts of cash or handling credit-card transactions, will have few alternatives to the business accounts of high- street banks. People with simpler needs will find better deals by shopping around.

The Co-operative Bank runs a low-cost account, Business Direct, for sole traders or businesses that do not need to borrow. As long as they keep pounds 2,000 in the account, deposits are free, cheques cost 18p each to write, and standing orders and direct debits cost 15p each. The Co-op's account is managed over the phone, and customers pay in cheques by post. Higher charges apply for people who use the bank's branch network.

"Traditionally, business accounts have been costed on the basis of building a relationship, and that is based on expensive banking time," says David Smith, spokesman for the Co-op. "With Business Direct, we say that if all you want is a basic, in-out account, you should not have to pay 60p to 65p per cheque."

Mr Smith also reiterates the view that borrowing is irrelevant to many self-employed people. Research last year by the Co-op found that 49 per cent of respondents had not borrowed in the last 12 months. Banks believe that as many as a third of businesses borrow no money at all. There are also cheaper and simpler ways to raise finance than a bank overdraft, such as leasing computer equipment or a car.

Other institutions also recognise that there is demand for a simpler business bank account. Nationwide has a savings account, Business Investor, with no charges for credits and the first six withdrawals a month. The minimum opening balance is pounds 2,000. The building society describes the account as for "businesses that want to put money away".

In December, the Abbey National launched a pilot business account. The trial, currently operating in the East Midlands and East Anglia, offers accounts to sole traders who stay in credit; limited company accounts are being planned. The Abbey's charges are higher than the Co-op, at 50p for most transactions, but there is no minimum balance. Managing the account is done by phone or post, although there will be area business managers.

According to Paul Nolan, marketing manager for the account, the Abbey's move is partially defensive. Self-employed customers were going elsewhere for their business banking, and Abbey National risked losing their personal accounts or mortgages, too. But he hopes the account will also attract new customers.

Mr Nolan admits that some customers do use personal accounts for business. He believes the new account will offer more choice, but he concedes that the Abbey will be wary about pressurising people to switch to the new account. "What we will say is what we have on offer might be more suitable," he says. "But we are not going to jeopardise our relationship for the sake of pounds 10 of bank charges."

Small business bank accounts

Transaction Standing Credits Standing order/ Cashpoint Writing

charges direct debit withdrawals cheques

Bank of Scotland none 20p 15p/10p 55p per pounds 100 49p

Abbey National pounds 2.50/month 50p 10p 50p 50 p

Barclays pounds 2.50/month 64p 45p 64p 64 p

Royal Bank of Scotland minimum:pounds 10 25p 50p 60p/pounds 100 24p

Co-operative Bank* none free 15p 18p 18p

Midland pounds 2.50 60p 35p 35p 60p

Lloyds pounds 2.50/month 63p 63p 63p 63p

NatWest pounds 2.50/month 67p 40p 40p 67p

*Higher charges apply for balances less than pounds 2,000