Businesses, big or small, entail frequent money transactions, both deposits, and withdrawals. Along with transactions, tracking expenses, organizing the cash flow, and recording funds is a common dilemma. Fortunately, current accounts offered by banks are a savior. Current accounts are widely used amongst businesses for various financial reliefs. In this article, current accounts, features, and pros and cons will be discussed in detail.
What is a Current Account?
To understand how current accounts benefit businesses, understanding the current account meaning is important. Unlike a regular savings account, a current account caters primarily to businesses, which generally have a higher number of transactions than regular retail banking customers. These transactions can be deposits, withdrawals, and contra transactions – where two organizations provide goods or services to each other on a decided value. Current account holders acquire the convenience of making instant transactions.
Features of Current Account
After understanding its definition, the next on the list are the features of a current account. A current account offers the following features, making it a compelling financial facet for businesses.
- Maintenance of a higher minimum balance is mandatory in a current account. For most banks, the minimum balance for a current account starts from Rs. 10,000. A penalty is applicable if the minimum balance is not maintained.
- There is no fixed period to have a current account.
- It supports frequent transactions through transfer funds, cheques, cash, pay orders, demand drafts, etc.
- A current account holder can make as many withdrawals as required, as long as they are capable of maintaining minimum account balance requirements.
- A current account offers an overdraft facility where the account holder can withdraw money when they are out of funds. Interest in the range of 8-10% is charged on the overdraft taken.
- No interest is offered on a current account.
- Many banks provide real-time transaction information and summary to make current accounts more facilitating.
Advantages of a Current Account
The above-mentioned features of a current account make it one of the most popular bank account types. While it does offer financial and transactional convenience to account holders, it provides a multitude of other advantages as well:
No Restrictions on Transactions
The current account allows account holders to carry out frequent transactions without any limitations. Deposits and withdrawals are allowed from both home and subsidiary branches. As a higher upper limit for transactions is set, there is no need to worry about the movement of money. Due to no restrictions, the account holder can enjoy fluidity in operations.
Build Credit Credibility
When an account holder requires a loan for business expansion, a current account enables them to assess their finances, and the bank provides a letter stating their creditworthiness. Additionally, creditors can access information about your credit score and creditworthiness.
Segmentation of Funds
Current accounts are used by businesses to separate personal assets and business assets. With a current account, cash inflow is tracked and recorded. This information helps the account holder in planning and managing their budgets. A roundup of the expenditure of the business is acquired through a current account.
Financial Facilities for Businesses
Businesses benefit from features like overdraft facilities, inward remittance, i.e., receiving money from foreign countries, internet banking, instant fund transfers, etc. Moreover, account holders do not have to pay additional charges for cheques and pay orders. Banks offer free demand drafts, NEFT (National Electronic Funds Transfer), and RTGS (Real Time Gross Settlement) based on your business.
Disadvantages of a Current Account
Along with a long list of advantages, a current account also possesses certain disadvantages. They are:
Zero or Low Interest On Deposits
Current accounts offer low or zero interest on the money present in the account. Account-holders miss the opportunity to gain money on their funds.
Confusing Paperwork
Current accounts involve much lengthier and more confusing paperwork and fine print compared to other accounts.
Limitations on Deposits and Withdrawals
Several banks have a cap on the number of free deposits and withdrawals. After crossing the capped limit, a fee is applicable. Some banks have a policy of providing 25 free transactions per month and free cash deposit facility of up to Rs. 2 lakhs in the home branch. However, this disadvantage differs as per the bank at which the current account is opened.
Difference between Current Account and Savings Account
Now, as the meaning and functions of a current account, is clear, let us understand how it differs from another widely used account type, i.e., savings account. Claiming that one type of account is better than another does not stand any ground as each caters to a different set of individuals with diverse needs.
The following table will provide a clear view of the current account vs. Savings account:
| Savings Account | Current Account | |
| Purpose | A savings account is a deposit account that promotes the savings habit of the account holder. It is designed to hold money that is not meant to be spent immediately by the account holder. | A current account is a deposit account that does not promote the savings habit of the account holder. It is an account made for businesses where instant and frequent transactions are made. |
| Eligibility | A savings account is suitable for salaried individuals with monthly income. This account is beneficial for individuals who are looking to save for short-term goals like future vacations, buying a car, etc. | A current account is suitable for businesses, traders, and entrepreneurs. |
| Transactions | There is a limit on the number of transactions allowed for a savings account holder. Most banks offer 3-5 free transactions in a month. | No limit on the number of transactions. |
| Interest | Interest is offered between 4%-6%. | No interest is offered. |
| Minimum Balance | The minimum balance for a savings account begins at Rs.5000. However, many banks offer zero-balance savings accounts as well. | The minimum balance for a current account is higher than that of a savings account. The balance begins from Rs. 10,000 for most banks. |
To keep a habit of saving and possess a financial safety net, business owners can have individual savings accounts.
Bottom Line
Current accounts are profitable for the business sector. It is a smart choice when it comes to managing the finances of a business. A current account provides easy deposits and withdrawals and keeps the account holders’ money in place.