Banks provide different kinds of accounts for various reasons. Current accounts and savings accounts stand out as the most common options among these. While savings accounts target individual customers, current accounts suit businesses.
Organizations and businesses that are involved in numerous transactions are among the groups that benefit most from current accounts, alternatively known as demand deposit accounts. Let us discuss the advantages and disadvantages of current accounts here.
Advantages of Current Account
There are several reasons why businesses should opt for a current account over a savings account. Following are the advantages of current accounts.
1. Easy Management of Business Finances
Companies require a current account to manage their money systematically and efficiently. Such a current account comes with advantages like chequebooks, overdraft facilities, and online banking, which will help streamline most common transactions. This makes it easier for business owners to manage their working capital better through timely customer receipts as well as vendor payables.
- Also Read: Savings Account Advantages and Disadvantages
2. Overdraft Facility
A current account’s strength is that it includes an overdraft facility; when your balance is low, you do not have to worry about anything because an overdraft on a current account will secure it for you. It helps to handle critical vendor arrears and other business operational costs prior to customer payments realization such that without breaking stride even for a moment after that.
Therefore, on receipt of some money into the same account, this is then deducted from what had been earlier taken out in excess; hence putting things back in their rightful place. It helps us to manage payments and our expenses, until we receive payments. After we receive the money, it will be deducted from the overdrawn amount. This helps to restore the current account to its normal form.
The overdraft function is thus a lifesaver, as it helps to restore our account balance to its original status. Additionally, the interest rate on an overdraft is normally between 10% and 13%. Hence, instead of seeking fresh funding, companies will prefer using an overdraft which is supported by a current account.
3. No Limitations on the Transaction Volume
Companies grow all the time. There are two main ways in which they can grow and they are: increasing the number of products sold or simply getting more customers. Companies would expand their markets or have new product lines when the existing ones are not profitable. One way to know when you have reached this level is through an account that does not have any restrictions on it due to growth prospects; thus, no additional charges will be incurred as your business expands. Transactions are available in any amount and any quantity. In order for the expansion of a firm to be possible, there has to be an account that is operational and that has been maintained for some time.
4. Easy Access to Business Loans
If you do not have any backup financial support, then getting a new term loan may not be possible. The only way is to take help from the current account, which serves as a blueprint for the success of the business and our financial situation.
If you have a current account, then it means your banker has a fairly good idea about your cash flow, repayment ability, and the amount of liquid assets. Therefore, it is easy for you to get a term loan or cash credit with competitive rates of interest. In order to get a loan, you do not need to start from scratch but can open your firm’s current account.
5. Streamlined payments
Current accounts allow direct debits and standing orders and help to simplify bill payments. The holders of the accounts can manage the regular items payable, such as loan repayments, insurance premiums, and utilities, on an automatic basis, making the process much easier. All this would avoid manual intervention and ensure that the bills are paid on time and for the right amount.
With a current account, transferring funds to other accounts is quick and convenient. Whether it is sending money to friends, clearing bills, or transferring money between one’s savings accounts, a current account facilitates seamless and timely fund transfers. There can be instant transfers through online and mobile banking apps for smooth financial transactions.
Disadvantages of Current Account
While a current account offers several benefits, there are also a few disadvantages, such as
1. Opportunity cost
Zero interest is paid on the current account so the cost of lost interest is implied. For example, suppose one has savings of two percent per annum in INR 10000 without earning anything from their present account this year alone. In that case, they will have missed out on INR 200, which would come because of the preceding interest opportunity.
It is extremely important to strike a balance between satisfying liquidity needs and maximizing potential returns while taking into account one’s risk aversion in managing this trade-off between opportunity cost and maximizing financial returns overall.
2. Additional Services
Businesses are already overburdened by the huge operational costs associated with using most current accounts. These current accounts have very common charges like monthly maintenance fees, transaction fees, overdraft charges, and foreign transaction fees. The additional expenses are moreover compounded by extra service fees that enable stop payments, account reconciliation, and compliance.
3. Minimum Balance
One of the most important disadvantages is when a customer will always need to ensure a relatively heavy balance in their account. This condition could lead to a fine in case they fail to maintain the latter stated level of money inside the said account during such times as emergencies.
Pros and cons of Current Account – Comparison table
| Advantages of Current Account | Disadvantages of Current Account |
| Ideal for businesses to systematically manage finances with benefits like chequebooks, overdraft facilities, and online banking, aiding in efficient cash flow management. | Does not earn interest, leading to an opportunity cost. |
| Provides an overdraft facility that helps manage essential payments and expenses when funds are low, with interest rates varying from 10% to 13%. | Requires maintaining a large minimum balance, with penalties for non-compliance. |
| Unlimited transactions without additional charges, supporting business expansion and growth. |
With high volumes of transactions, managing the account can become complex and time-consuming. |
| Facilitates obtaining loans as the current account provides a clear picture of business cash flow and financial stability to bankers. | Charges fees for each transaction, potentially increasing costs for businesses with high transaction volumes. |
| Simplifies bill payments through direct debits and standing orders, ensuring timely and accurate payments, and enables quick fund transfers. | Incurs additional operational costs for various services. |
Conclusion
If you are looking to start a business, you will find that a Current Account is a primary requirement to get started. This will assist you in finding investors or submitting an application for a business loan to meet your financing needs.
Current accounts offer a variety of features that are specially tailored to new businesses. You can get a host of value-added services and add-on features that suit the needs of every business.
