What Is Zero Balance Account?
A zero-Balance Account is a savings account in which a bank allows the account holder to maintain a zero balance as per choice without any penalties or additional charges. The primary purpose of this account is to provide banking options for people who may need a regular income or have unpredictable cash flow.
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Source: Zero Balance Account (wallstreetmojo.com)
This account allows corporations to maintain a savings account, and only when a particular amount is required in it a deposit from the master account is initiated. Moreover, banks offer zero-balance accounts to attract more and more people to open accounts with them. Hence, these accounts are helpful for businesses to track their cash flows more effectively and avoid the risk of overdrafts or other fees.
Table of contents
- What Is Zero Balance Account?
- Zero Balance Account Explained
- Examples
- Advantages And Disadvantages
- Zero Balance Account vs Normal account
- Frequently Asked Questions (FAQs)
- Recommended Articles
Key Takeaways
- Zero balance accounts are saving accounts with no minimum balance requirement. Therefore, account holders can have zero balances without any fines or charges.
- Companies opt for such accounts for better fund distribution, and only when a certain amount of money is required is deposited from a master account.
- Therefore, they are mainly automated risk-mitigated accounts with a proper audit and reconciliation of fund checks and authorized transactions.
- Both businesses and individual customers reap the benefits of this account in their way.
Zero Balance Account Explained
Zero balance account definition is a type of account where the balance is automatically brought down to zero at the end of each day. Hence, this account is linked to another account, such as a savings or fixed deposit, where excess funds are transferred. It is created by understanding the need for funds, encouraging more people to open accounts, and saving money with no obligation of always keeping a particular amount intact.
Furthermore, it lets people withdraw their money whenever they want without thinking twice about the set amount barrier. Hence, an online zero-balance account can be a convenient banking option for customers who prefer to manage their finances online.
A business can have multiple accounts of this type, but an individual can have only one such type of account. For zero balance account opening, a company must submit a good credit history with reasonable transactions and the general documentation required for identification. Additionally, it is easy for big corporations to allow a single type of this account for a particular project or business operation. Excess expenses are regulated, and only the required amount is shared with the project authorities.
As for lower and mid-income people, it is advisable to have this account to easily withdraw money without obligations from the bank or later have to face fines or penalties. In addition, banks typically offer these accounts to small businesses, self-employed individuals, and low-income households to encourage them to use banking services and build a credit history.
Furthermore, a zero-balance account agreement is a legal contract between the bank and a customer that outlines the terms and conditions of this account. Hence, this agreement typically includes the following information,
- Account holder information
- Account Terms
- Linked account information
- Overdraft protection
- Termination clause
Examples
Let us understand the concept better with the help of some examples.
Example #1
Let’s assume Simon has just started working after college. The job is good, but the salary needs to improve. Since Simon is more inclined towards learning and gaining experience, he accepted the position. Still, now Simon needs a bank account, and Simon knows that by the end of every month, Simon will have to use every penny to survive the days. Therefore he researches and opens an account in the local bank of his town.
It is beneficial for Simon because no minimum balance is required in this type of account. Therefore, he doesn’t have to maintain a careful balance in his performance and receives a debit card, a passbook, and a checkbook. The interest rate offered by the bank is low compared to a regular account, but Simon is happy. It is a simple zero-balance account example. The bank may ask for particular documents for identification purposes, which is typical for all accounts.
Example #2
Let’s say that a small business named The Tree Fellas has a master account with $10,000 in it and a zero balance account setup. Hence, the company expects to have several checks written from this account over the next week, but they are unsure how much those checks will be for.
Therefore, when a check is presented for payment on this account, the bank automatically transfers funds from the master account to cover the check amount. Besides, if insufficient money is in the master account to cover the check, the banks will not honor the bill, and the business will be charged inadequate fund fees.
So, at the end of each day, any remaining funds in this account are swept back into the master account so that the zero balance account always has a zero balance. Hence, this ensures that the firm is not holding excess funds in this account, which would be better utilized in the master account.
Advantages And Disadvantages
Advantages
- It saves the time and energy of account holders as these are self-managed and automated.
- With this account, businesses can manage their cash flow more efficiently since they do not have to worry about maintaining a balance in the statement.
- Besides, they offer zero-balance maintenance without any additional charges or penalties.
- These accounts are easier to audit, reconcile, and report funds.
- Helps in monitoring the expenses authorized by the corporation.
- These are proven suitable accounting mechanisms with fewer clerical errors and fees.
Disadvantages
- As they are designed to maintain a zero balance, there is no opportunity to earn interest on the funds held in the account.
- There is a deposit limit, which means that the account holder cannot deposit beyond a certain amount of money.
- Some banks charge additional fees for opening zero-balance accounts, such as setup or monthly maintenance fees.
Zero Balance Account vs Normal Account
A zero balance account is a type of account that is designed to maintain a balance of zero. In contrast, a normal account allows customers to deposit and withdraw funds as needed. But first, let us look at the comparison to understand it better.
| Features | Zero Balance Account | Normal Account |
|---|---|---|
| Account Balance | Maintained at zero | Balance can vary. |
Fund Transfers | Automatically transfers funds from a master account to cover transactions | Mutual transfers between accounts. |
Interest Earnings | None, since Balance is always zero | Variable interest rates can be applied |
Maintenance fees | It may be lower due to a zero balance | These are higher fees depending on the account balance |
| Overdraft protection | Automatic transfer of funds from the master account | Results in overdraft fees |
Frequently Asked Questions (FAQs)
It is usually possible to convert these accounts to a normal ones. However, the process for doing so may vary depending on the bank or financial institution. In addition, it is essential to note that the specific terms and conditions of the standard account may differ from those of this account.
The requirements to open a zero-balance account are as follows –
– Banks may be offering it to a particular set of customers
– Businesses have shown a credit history and prior transactions to establish trustworthiness and reference.
– Proper documentation, company registration, identification, and address proof
– Many banks may ask for a current customer reference to let an applicant open.
Business entities and ordinary people consider zero balance accounts good financial products. No minimum deposit is required, which helps businesses mitigate risks, avoid unauthorized transactions, and relegate the unrequited amount back to the master account.
Recommended Articles
This article has been a guide to what is Zero Balance Account. Here, we compare it with normal account, explain its examples, advantages, and disadvantages. You may also find some useful articles here –
- Temporary Account
- High-Yield Savings Account
- Joint Account
This post first appeared on Free Investment Banking Tutorials |WallStreetMojo, please read the originial post: here
