What Is a Zero Balance Account? A Guide for Small Business Owners

If you’re a small business owner, you know that you’ve got a lot of expenses. Keeping track of when they’ve come due, if they’ve been paid, and whether the accounts you keep your cash in are balanced can require a lot of work.

To help, many banks offer their corporate clients a variety of cash management tools that cut down on at least some of that labor demand. Zero balance accounts are one such tool.

A zero balance account (ZBA) is a business checking account that maintains a $0 balance until the business needs to draw money from the account. Once the business makes a transaction against the account, funds are automatically transferred into it from the company’s main account to pay for those expenses.

These accounts help businesses manage their cash flows and budgets. Businesses also use such accounts to avoid having large amounts of excess funds. By centralizing their cash flow, businesses limit the chance of clerical errors and ensure that money is only withdrawn when necessary.

Key takeaways

• Zero balance accounts are bank accounts that have a $0 balance until the business has cash flow needs.
• Most cash stays in a master account, which may earn interest or be used for investment opportunities.
• When the business needs money for certain expenses, cash is automatically transferred into the ZBA.

Zero balance account defined

Zero balance accounts are not like most personal checking accounts. These accounts have specific purposes, such as paying for a department’s expenses. For instance, the cash may be used for payroll or to cover one-off expenses.

Instead of each department having its own account with a running balance, most funds are kept in a centralized account. This simplifies budgeting across different parts of the company.

ZBAs also help businesses ensure cash is available for other departments and budgetary purposes. The automated functioning of many ZBAs could reduce the amount of time the business may otherwise spend processing transactions manually.

How a ZBA works

When a business needs money in a ZBA, it is automatically transferred from the business's central or main account. Once the money is in the ZBA, the business can use it to pay for transactions as needed.

Any cash left in the ZBA at the end of each day is automatically transferred back into the main account. By removing the human element from the cash transfer process, using a ZBA lowers the risk of error and reduces the chance of fraud thanks to a simpler, streamlined paper trail.

Still, ZBAs don’t entirely eliminate the need for human intervention. Businesses must manually reconcile all the account’s transactions. This helps ensure everything is processed successfully and there are no failed transactions.

A business may open various ZBAs for different teams, projects, or initiatives. As mentioned, this helps with budgeting since the business can allocate money to different ends as needed.

Pros and cons of zero balance accounts

The overarching benefit of using a ZBA is that it should simplify budgeting and reduce cash management errors. Still, they can have downsides.

For one, businesses must regularly reconcile transactions to ensure there are no issues. If a transaction fails for any reason, it could create the need for multiple transactions that require more work to address.

How to open a zero balance account

If you feel the pros of ZBAs outweigh the cons, you may be interested in opening one. However, not just anyone can open these accounts. Generally, you must be a business owner to open a ZBA. Often, these accounts aren’t available to consumers. These accounts likely aren't for you if you have limited cash flow or structure.

In addition, you typically need to have your main account and zero balance accounts at the same bank. The bank may require you to meet certain cash flow and credit-related requirements, which may vary depending on the bank.

If you believe you meet the requirements to open a ZBA, you must follow your bank's application process. Application processes vary but can often be completed online or in-person, possibly over the phone if you prefer.

Naturally, you may have questions about opening a ZBA. Don’t hesitate to speak with your business banking representative with any questions you may have during the process.

You should also pay close attention to the fees and policies associated with your account. ZBAs could save your business time and money, assuming the bank you decide to work with doesn’t charge excessive fees. A low daily transfer limit could also limit the account’s usefulness. Review all documentation carefully before moving forward with the account opening.

FAQs

Bottom line

A zero balance account could be a great way for businesses to manage their cash flows and simplify budgeting. They do this by assigning bank accounts to various departments or projects and transferring money into them only when needed.

Although they sometimes create extra work, ZBAs generally reduce clerical work and manual entry. They are great for small businesses, but if you have a large, established business with strong cash flows, you may be the right customer for a ZBA too.

You could do this by visiting your existing bank online or in person and seeing if it offers these accounts. If not, look into the best banks and see if they offer ZBAs. This could mean switching your business bank account, but it may be worth it if you are set on opening ZBAs for your business.