The banks that like to say no

Self-employment: In the third of our series we look at banking and what it costs to run a business account

Business bank accounts come with large, impressive cheque books. Unfortunately, writing that large cheque means a large banker's fee.

Variety, competition and free banking are the currency of personal accounts, but business banking is weighted heavily towards the needs of businesses that borrow, or have complicated banking requirements such as handling credit card payments.

The Inland Revenue strongly recommends using a separate account for any self-employment or freelance work. Anyone working for themselves faces a harsh choice: open a business account and pay in excess of 60 pence per transaction, or use an ordinary account and hope the bank looks the other way.

"A lot of people in businesses like professional consultancy, part-time work, working from home, or with a secondary income, do not actually consider themselves to be small businesses. They just see themselves as earning a living," concedes Mike Conroy, at Midland Bank.

Currently only the Co-operative Bank has responded to the growth in self- employment with a purpose-built account. According to Nick Massey, marketing manager for Business Direct, serving smaller businesses with straightforward banking requirements is a niche not well served by other banks.

Co-op's research showed that 380,000 businesses do not borrow money and that a growing number of customers are happy with the idea of phone banking. "We believe businesses are paying for other people's overdrafts," said Mr Massey. "If you are only using a bank for the day-to-day running of an account, that should be reflected in the price."

Business Direct is cheaper than the high street banks' business accounts. The Co-operative Bank charges 18p for writing cheques; most rivals charge at least 60p. Deposits to a Business Direct account are free, but most other banks charge around 60p for that too.

There are drawbacks. The Co-operative Bank has fewer branches than rivals, so the account works by post and phone. This means cheques take a day longer to reach an account than they would via a high street bank. Furthermore, anyone opening a Business Direct account has to pay in pounds 2,000 and keep at least that balance in the account to avoid a higher tier of charges. In its defence the Co-op argues that relationship banking is on the wane and that not all customers want, or are willing to pay for, the bank manager's ear. "The idea of a game of golf with your manager is laughable," Mr Massey says. Charges, though, are a more likely reason to change. Anyone used to free personal accounts will find business banking a shock even though the high street banks offer initial charge-free periods, typically of 18 months.

The banks concede that a significant number of people use personal or savings accounts for business transactions. Most banks can create a "No 2" current account to separate different sources of income; some self- employed people use separate deposit accounts for their self-employed fees.

Whether this is possible depends on the sort of business and the attitude of the bank itself, especially at branch level. An account with a few, regular large cheques from clients may go unnoticed for years. Turning up with bags of cash every Friday is likely to result in a swift interview with the manager.

Banks and building societies' views differ widely, at least in public, about what they will accept. "Our managers run branches as profit centres," explains Mr Conroy. "If someone comes in who is a valuable customer and wants a number two account to separate business expenses, then so be it. It only becomes a problem if the costs go up."

"We think it makes a lot of sense to keep business accounts separate," suggests Mr Massey. "But a personal account might be adequate for a one- man band using his own name." Others are less sanguine, especially the building societies or converting building societies with cheque accounts.

"We do not have business accounts," says Mark Hemmingway, of Halifax. "We are aware that some people do use their current accounts as business accounts. If we know of people in that position, we write to them and ask them to stop."

A less draconian response would be to offer the self-employed tailored accounts. Rumours persist that First Direct, the up-market phone banking operation, will launch a business account, but it has yet to do so. Nor have the former building societies been tempted into the business arena.

Case study: why a phone service made sense

Sarah Duheaume runs a media buying organisation, Just Media Ltd, based in south London. Just over a year ago she moved her business' sterling banking to Business Direct. Foreign currency trade is still handled by one of the "big four" banks.

Ms du Heaume was attracted to the idea of direct banking by her experiences with a personal account at First Direct, which she says gave much better service than her local bank. "Banks for business are not very good," she says. "They do not seem to understand that it comes down to service."

As a busy manager Ms du Heaume says she appreciates being able to carry out transactions by phone. If she phoned her regular bank the chances were that it would not be able to deal with the query there and then. Although not perfect, in most cases Business Direct can help, she says. Lower charges are not the only criteria, she believes.

"If the bank is saving on overheads it can pay people a bit more and recruit a better quality of staff to make the service better."