If you are self employed and working as a freelancer in the services industry, you may be debating whether you should work as a sole proprietor or register as a business. There are pros and cons for each, and the answer is not clear cut.

I ran my business as a sole proprietor for 12 years. When I decided to make the switch and incorporated my business a year ago, it was a good move for my stage of business, and I don’t regret it.

While there was no real tax advantage, it professionalised my business and made managing my finances and accounts easier. What I did not count on, however, was the increase in banking fees.

Despite running the same number of transactions as I had as a sole proprietor, I was now having to pay double in bank fees, because I was now a “business”. The single advantage was that the bank I use, FNB, offers a free accounting package called Instant Account which has made managing my accounts much easier. That said, however, there are other free accounting services like Wave which is suitable for a business with a relatively small turnover.

No credit record

What I further discovered is that as a newly formed business, I have no credit record – despite having run the business for 12 years as a sole proprietor. When you register a business, you effectively start a new entity with no trading history.

While banks are very happy to hand out credit like candy when you open a personal account, when it comes to having a business bank account, they are extremely conservative. So, while as a sole proprietor I had a credit card with a substantial limit that allowed me to book flights and accommodation when I travelled for work, this was not available to me once I opened a business bank account. This is because my personal credit record became irrelevant.

The irony is that one can draw a salary from the business and get personal credit on that salary, but the same credit would not be offered to your business. This means that, in effect, a bank is prepared to extend you credit for consumption like buying shoes and clothes on your credit card but has restrictions on providing credit for business development.

One could enter a formal process of applying for credit which involves submitting audited business accounts as well as a personal balance sheet. Keep in mind you need to be operating for at least six months before you can provide those statements and as a small business you may not be employing the services of a certified accountant. So, this all comes at an extra cost.

While this is all extremely frustrating, I do understand from the bank’s perspective that small businesses carry significant risks. Losses on loans are far higher for small businesses than personal loans. Certainly, if one is applying for a large loan the documents and vetting process are necessary, but for a small credit card limit, it appears excessive.

Despite my frustrations, FNB claims it is one of the better banks when it comes to extending credit. They have created a credit score methodology which allows for a credit facility without all the paperwork, but only after having the account for over a year. Obviously, the business bank account would have to have been well managed during that time. But again, it takes a year to access credit.

The banks could do a lot more to assess the needs and relative risks of a small business and apply some logic. So, before you switch from being a sole proprietor to running your own small business, add banking costs and credit limits to your list of pros and cons.

This article first appeared in City Press.