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How Does a Small Business Use a Zero Balance Account?

If you’re a small business owner, it might feel counterintuitive to have a business checking account with the goal of keeping a $0 balance.But that’s actually the whole point of a Zero Balance Account: You use that dedicated checking account to fund a specific expense, such as payroll, departmental spending, petty cash, travel reimbursement, or any other business need. Funds are sent to a particular Zero Balance Account  only when necessary to cover checks or debits. At the end of every day, any money in the Zero Balance Account is transferred back to the primary account.

young business woman checking laptop

Small businesses often use these types of accounts because they help control finances, increase efficiency, and allow all funds to take advantage of higher interest rates.

What is a Zero Balance Account?
Typically, a small business owner who has a primary business account will open a low- or no-interest-rate Zero Balance Account tied to the main account. The small business’s large pool of money is in its primary business account, which typically enjoys a higher interest rate.

Think of the Zero Balance Account as the “child” account to a master or “parent” business account. Each time a charge gets posted to the Zero Balance Account, the exact amount of the charge is transferred from the parent account to the child account. If the Zero Balance Account has any money left in it at the end of each day, it automatically gets transferred or “swept” back into the parent account, leaving the balance at zero.

So the primary account always possesses the money. It only transfers funds to the Zero Balance Account on an as-needed basis. And when it does transfer funds, it’s only for the exact amount required — never more than that.

Going back to the parent and child account analogy, a parent is in control of the family’s finances and holds all of the money. The parent gives the child just enough cash to buy a soda pop and a candy bar at the store. Any leftover cash goes right back to the parent.

What are the Advantages of a Zero Balance Account?
A zero balance account offers many advantages to the small business owner:

  1. It saves you time. You won’t need to manually move and track funding, or balances for your accounts because you can automate your transactions. As long as the primary is at the same bank, transfers can be automated from one account to another.

  2. It limits banking and clerical errors. Keeping funds in the main account and automating the process of moving money around minimizes the chances of accidental overdrafts, clerical errors, or racking up fees.

  3. It’s easier to audit and track spending. Zero Balance Accounts can help you monitor spending for different departments, short-term payroll and on a more granular level. If one entity is overspending, you’re more likely to spot it with this type of account than if you were manually tracking funds.

  4. It reduces the risk of fraud. The more bank accounts you have, the more time you need to spend monitoring them for fraudulent activity. If you have one main account holding the money, you can reduce your risk of being compromised.

  5. It optimizes cash flow. A Zero Balance Account lets you aggregate funds and use them to invest and fund other business goals instead of having small amounts of money sitting idle in various accounts.

  6. It provides more spending control. Because this type of account carries a zero balance, debit card purchases usually need to be preapproved before they can be made. This gives you, the small business owner, more control over spending and allows you to put procedures in place for how your business will conduct purchases.

What Type of Small Businesses Should Consider a Zero Balance Account ?
Zero Balance Accounts are ideal for any business that keeps an operating account and separate accounts for things like payroll, petty cash and travel reimbursements. As mentioned earlier, small businesses can concentrate all funds into an operating account and make disbursements from the subsidiary accounts, which always maintain a zero balance.

Not only are Zero Balance Accounts for debit transactions, they can also be used for receivables. This allows a business to collect funds safely outside of its main operating account for Account Receivables. In this instance, the funds from the receivables account get pushed to the operating account instead of pulled from it.

This allows automatic transfer of funds to cover payments.  At the end of the day, you can quickly and easily determine your daily cash position and optimize your funds.
Open Your Zero Balance Account Today
Zero Balance Accounts are just one service First National Bank and Trust offers small businesses. We’re here to serve you and your small business in a number of ways including business loans, Solutions Checking, online business banking, business credit cards and much more.

If you’re a small business owner in Southern Wisconsin or Nothern Illinois and you’d like to learn how we can help you start and grow your business, find one of our 16 locations nearest you, or contact us.