6 Things to Do When Your Business Bank Account Is Closed

Has your bank or credit union unexpectedly closed your business account?

It's a serious setback for businesses when bank accounts get shut down, leading to possible delays in paying salaries, vendors, and bills linked to the account.

Moreover, it can disrupt customer payments and make securing a new account more challenging, whether at the same or different bank.

What to do when this happens?

This article covers possible reasons why a financial institution might close your account, what to do next, how to withdraw money from a closed account, and a bonus tip on avoiding account closure. 

Let's get started. 

Why Is Your Business Bank Account Closed?

There are several reasons why a bank closes a business bank account; here are some of the most common ones. 

Account Considered As Dormant 

An account is considered a dormant account or an inactive account when it has been inactive for a long time, with no transactions, communication with the bank, logins, or money movement, except for earning interest. 

In most cases, banks charge inactivity fees rather than closing the account. However, if the account balance is insufficient for fee collection or it simply has zero balance, a bank might close the account.

Breach of the Terms & Conditions 

This might involve, but is not limited to:

• Not upholding a minimum balance 
• Having excessive overdrafts
• Not meeting account criteria
• Experiencing a high number of chargebacks or disputes
• Frequently returned deposits or bounced checks
• Negative credit history 
• Inability to provide supporting documents for payments made, although this usually results in an account suspension rather than closure

Suspicious Transactions 

Banks, confronted with increased regulatory oversight on clients' business activities related to anti-money laundering and counter-terrorist funding, may freeze or close the account if they detect suspicious transactions.

These include, but are not limited to:

• Transactions with high-risk countries
• Transactions with high-risk or sanctioned individuals or companies
• Transactions involving shell companies
• Significant sums are deposited with immediate subsequent withdrawals
• Large cash movements
• Mismatched business activities

Suspected Frauds

Fraudulent activities may stem from actions by the account holder or external factors like unauthorized access, identity theft, or other malicious actions by third parties.

When banks notice activities or transactions in an account that raise concerns about intentional deception for financial gain, banks take precautions to protect both the account holder and themselves. This may involve freezing or closing the account to mitigate potential risks before conducting further investigations.

Criminal Conviction

If your bank finds out about a past criminal conviction that you didn't report to the bank during the application process, or if you are convicted of criminal activity after opening the account, it could lead to the closure of your account.

Changes Following Bank Policies

Banks undergo policy adjustments for various reasons, and these modifications can impact your business account. 

For example, banks may alter their risk management policy– the framework in place for reviewing customers to manage risks and safeguard their reputation – and, as a result, label your business as high-risk. Hence, they might close your account as a precaution.

Banks can also undergo internal changes or strategic shifts, such as restructuring or discontinuing services in specific locations. These changes could be why your business account is closed. 

🔎 Tip: Another challenge akin to account closure is account freezes. Find out why accounts get frozen and get insights on how to unfreeze your account. 

What Happens When A Bank Closes Your Business Account?

After the account is closed, the debits will be blocked, and deposits will be rejected.

Typically, your bank will send you a notification by mail or email, but it is within the legal right of the bank to close your account without giving any notice, and they are not required to state the reasons explicitly.

In instances where the bank does not inform you, you might only become aware of the account closure when your credit card or debit card is declined.

Nevertheless, unless the bank discerns illegal activities, they are mandated to return any funds held in the account. 

A closed bank account usually doesn't have a direct effect on your credit score. 

Yet, if there are outstanding overdraft fees or any other outstanding balances in the account, the bank might share this debt information with a collection agency. This can result in a negative credit report from the credit bureaus. 

Additionally, it might create difficulties when trying to secure loans or credit in the future.

What To Do When Your Bank Closed Your Account

Addressing the aftermath of banks closing accounts involves taking swift actions and understanding what to avoid to prevent wasting time. 

Let’s look at the necessary steps.

Step 1: Contact Your Bank

Reach out to your bank immediately about your remaining funds, but avoid arguing about the bank account closure.

You can attempt to contact the bank to inquire about the reasons for the account closure and what to do next. However, if the bank is unresponsive or unwilling to provide information, it is often not worthwhile to dispute the closure, lack of notice, or absence of reasons because banks can legally close accounts without warning and aren't required to provide reasons.

Step 2: Check Your Credit Report

Check your credit report with a reputable entity in your jurisdiction.

In the United States, you can check the ChexSystems report produced by a consumer reporting agency subject to the regulations of the Fair Credit Reporting Act for any negative bank reports related to closed checking accounts, savings accounts, or other deposit accounts across banks and credit unions.

You might have grounds for disputing if you believe a bank that closes your account reports inaccurate information about your banking history. 

Having a negative ChexSystems report will make it difficult to open a regular bank account later on. In such cases, opting for second-chance bank accounts, specifically designed for individuals with less favorable banking or credit histories, could be an option. However, keep in mind that these accounts come with limitations, namely spending limits. 

Step 3: Stop or Change Automatic Bill Payments

If you have set up recurring payments or automatic withdrawals used to pay for loans, monthly utilities, or other regular expenses, make sure you suspend them and make other temporary payment arrangements.

Failure to do so may result in late fees or returned payment charges, which only adds to your financial headaches and could affect your credit scores. 

Step 4: Stop Incoming Payments

If you have a backup account, inform your clients about the switch to direct deposits. If you don't have a backup, let your customers know that you are in the process of changing your bank account. This helps prevent any issues with bounced transactions and avoids additional charges.

You also want to avoid your clients questioning your reputation, and you definitely don't want them to be unsure about the situation if they face issues while making debit transactions with you.

Step 5: Pay for the Negative Balance 

If a bank has closed your account due to a negative balance or your account is closed with a negative balance, it's crucial to promptly settle the outstanding balance and address any associated overdraft fees.

Delaying payment may involve a debt collector hired by the bank, which potentially affects your credit scores. 

Step 6: Open a New Bank Account or Look for Alternative Solutions

Reopening a closed bank account may be possible only in certain situations, usually in case the bank closes your account due to inactivity. However, the process takes time, and there is no guarantee. 

In some cases, such as unauthorized access or changes in bank policies, a closed bank account can’t be reopened. 

Therefore, you should set up a new business account as quickly as possible to keep your business operation running. 

Having said that, opening a business bank account with a traditional bank may not be easy, quick, or the most fitting option for some businesses.

Consider your specific needs. If you primarily receive online payments and don't heavily rely on banking and cashing cheques, fintech solutions or alternatives like virtual banks and neobanks can help. 

Virtual banks and neobanks are financial institutions that often collaborate with banks or other reputable establishments. They offer online banking solutions customized for business needs, standing out with a quicker application process, a digital-first approach, and generally more competitive fees. 

How to Get Money Out of a Closed Account

When your business bank account is closed, the usual practice is for the bank to issue a cheque for the remaining balance.  They may mail you the cheque or ask you to collect it at a branch, so make sure they have your correct name and address on file.

If your bank has not reached out to you, take the initiative to contact them and inquire. Unless the bank suspects illegal or fraudulent activities, they are obligated to return any funds previously held in the closed business bank account. 

Tips to Prevent Bank Account Closure

You’re probably wondering if there’s anything you can do to avoid having your business bank account closed.

Predicting what banks want can be challenging. While we don't have a guaranteed solution, we do have some suggestions. At a minimum, consider doing the following: 

• Keep your account active
• Maintain minimum balance requirement
• Use the account for intended purposes
• Follow your bank's terms and account agreement
• Review monthly bank statements and monitor fraudulent activity 
• Avoid negative balance and repeated overdrafts
• Communicate with your bank or business account provider in advance if you plan to use your business account overseas or for unusual transactions.
• Complete your annual risk profile questionnaire.
• Organize administrative documents for audits

💡 Tip: Consider maintaining multiple business accounts across different financial institutions to spread your funds and mitigate risks from unforeseen circumstances.

Final Note

Facing the unexpected closure of your business bank account can be overwhelming, but It's crucial to act swiftly and strategically: inform your clients and suppliers, update automatic payments, and reach out to your bank for clarity and to secure any remaining funds.

To prevent this financial headache, stay alert, adhere to bank terms, maintain transparent transactions for a healthy banking relationship, and familiarize yourself with common reasons for account closures, including inactivity, term violations, and suspicious transactions.

If dealing with traditional banks proves challenging, consider reassessing your banking needs and explore alternative account options, such as virtual bank accounts, to see if they better suit your requirements.