This guide is your manual to understand trade credit - the financial GPS that can keep your collaborations running smoothly, making success your constant companion.

Trade credit is an arrangement wherein a supplier allows a buyer to purchase goods or services, deferring payment for a specified period. It serves as a short-term financing option. Typically, trade credit terms outline the credit period, interest rates, and repayment conditions. Credit terms in international trade aren't uniform,&nbsp; varying across businesses and industries.&nbsp;

Trade credit is a common practice, enabling companies to maintain inventory levels, meet operational needs, and navigate economic fluctuations.&nbsp;

Credit limits are not static and can change over time based on the buyer's evolving credit history, based on assessment of the creditworthiness. Borrowers who consistently maintain a positive credit history may find opportunities for credit limit increases.&nbsp;

Consider this case study of Grasim Pvt Ltd. and US Fitness Inc.

In a <a href="https://www.skydo.com/blog/building-a-global-network-for-your-cross-border-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">cross-border collaboration</a>, Grasim Pvt Ltd., known for its custom mobile applications, engages with US Fitness Inc., a leading US fitness firm. The task involves delivering three specialized mobile apps tailored to suit the unique needs of US Fitness Inc.’s operations.

According to the terms, US Fitness Inc. commits to making payments within fifteen days of receiving each mobile application. Grasim Pvt Ltd. delivers the first app as the collaboration unfolds, and US Fitness Inc. has a fifteen-day window to complete the payment. This process repeats for the subsequent two applications, each installment with a fifteen-day payment timeline.&nbsp;

The trade-credit terms allow US Fitness Inc. to evaluate each application before making payments. This arrangement aids their decision-making process and benefits the working capital requirement.&nbsp;

For Grasim Pvt Ltd., the trade credit terms provide a stable cash flow, with staggered payments offering financial predictability throughout the transaction. This case study exemplifies the strategic use of trade credit in <a href="https://www.skydo.com/blog/cut-international-transaction-costs-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international transactions</a>, fostering a mutually beneficial relationship between the two businesses.

Open account trade credit allows buyers to receive goods upfront and defer payment within an agreed period.

Trade acceptance introduces a more formal structure where a detailed draft outlines payment terms.

A promissory note is a written commitment where the borrower pledges to repay a specific amount by a predetermined date.&nbsp;

Understanding different types of effective financial arrangements is crucial for the following reasons:

Recording trade credit involves choosing between cash and accrual accounting methods, each impacting financial statements and cash flow differently.

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The accounting of trade credit transactions is done when actual payment occurs. This provides a straightforward view of actual cash movements, making it simpler for small businesses. However, it doesn’t accurately represent the financial health as it doesn't consider credit transactions until payment.

Accrual accounting recognizes transactions when incurred, not when cash changes hands. For trade credit, this means recording transactions when goods or services are received, regardless of the payment date. It accurately represents a business's financial position, requires meticulous record-keeping, and may not align with actual cash flow.

<a href="https://www.skydo.com/blog/top-accounting-tools-for-tech-exporters?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Cash accounting</a> can make cash flow appear more stable. Accrual accounting, however, may reveal fluctuations in financial health, showing credit transactions that still need to translate into cash.&nbsp;

Larger businesses therefore adopt accrual accounting, which complies with Generally Accepted Accounting Principles (GAAP) and provides a more comprehensive financial picture.

The Cost of Trade Credit and How to Calculate It

Grasim Pvt Ltd. offers US Fitness Inc. a 2.5% discount on the project cost of 1 million USD for making payment within 7 days. The calculation of the early payment discount is as follows:

Early Payment Discount = 1,000,000 USD × 2.5% = 25,000 USD

However, US Fitness Inc. must weigh this discount against the value of their working capital. For example, if it needs to borrow funds for early payment, then the cost of borrowing must not exceed the early payment discount.

In the above example, late payments by US Fitness Inc. would incur a 1% penalty on the project cost. The calculation for late payment penalties is as follows:

Late Payment Penalty = 1,000,000 USD × 1% = 10,000 USD

To avoid these penalties, US Fitness Inc. must evaluate each delivered mobile application within the fifteen-day window, aligning with their decision-making process and minimizing the risk of late payments.

Best Practices for Extending and Utilizing Trade Credit

Implementing these best practices enhances the effective management of trade credit, minimizes risks, and optimizes financial resources for businesses.

1. Regularly Check and Analyze Customer Credit History

3. Finance Trade Receivables Through Invoice Discounting or Factoring

Trade credit is a catalyst for business expansion, fostering mutually beneficial relationships. But one must maintain a delicate balance in controlling credit and payment terms.&nbsp;

Businesses can navigate the complexities of trade credit by regularly assessing customer credit histories and considering tools like trade credit insurance. This proactive management safeguards against potential pitfalls and sets the stage for a resilient and prosperous B2B ecosystem.&nbsp;

Ans: Any business that buys and sells goods or services can use trade credit. Trade credit is particularly common in the business-to-business (B2B) context.

Ans: The cost of trade credit is the interest or discount a business may incur when it uses credit terms to make purchases. It is essentially the opportunity cost of not paying for goods or services upfront.

Ans: Trade credit can be long-term and short-term, depending on the agreed-upon terms between the buyer and the supplier. Short-term trade credit is more common, with payment typically due within a few weeks or months after the delivery of goods or services. However, some trade credit arrangements may extend to longer periods (in specific industries).

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Every business wants speed and convenience. It is the mantra In the contemporary world of commerce, and cash transactions have naturally taken a backseat. Even outside the capital markets, we see the reign where credit and trust are a currency. Transactions of all sizes are hinging on a fundamental pledge—the buyer commits to settling the bill later.&nbsp;

Today, physical currency only changes hands with this financial choreography, the bill of exchange.

A bill of exchange is a written, unconditional commitment by one party, known as the drawer, to another party, the drawee, to pay a certain sum of money to a third party, the payee, either on demand or at a specific future date. This financial instrument serves as a guarantee of payment for goods or services provided.

The bill of exchange has been a fundamental legal instrument in global trade, binding the exporter and the importer and enabling smooth transactions between parties across international borders.&nbsp;

In case of dishonor, the payee can seek legal recourse to enforce payment, utilizing the legal provisions outlined in the governing framework to ensure the settlement of the outstanding amount and any associated damages or penalties.

Let's consider a scenario where a Bengaluru-based software company (Exporter) is providing software services to a Silicon Valley company (Importer). The Bengaluru company, acting as the exporter, creates a Bill of Exchange. This document includes details such as the total amount due, the due date, and other relevant terms.

The Bengaluru company is the drawer, the Silicon Valley company is the drawee, and the bank may be involved as a financial intermediary. The Silicon Valley company reviews the document and, if satisfied, accepts the Bill of Exchange, acknowledging its commitment to pay the specified amount on the due date.

On the due date specified in the Bill of Exchange, the Silicon Valley company makes the payment to the Bengaluru company or through the bank. The transaction is considered complete, and the Bengaluru company delivers the software services as agreed.

A bill of exchange offers several key advantages, making it a valuable tool in commercial transactions and international trade.

A bill of exchange comprises several key components that define its structure and functionality, ensuring clarity and enforceability within commercial transactions.

A bill of exchange involves three parties: the drawer, drawee, and payee, where the drawee must pay the payee. In contrast, a promissory note is a two-party instrument in which one party unconditionally promises to pay a specified sum to the other party.&nbsp;

A bill of exchange is suitable for commercial transactions involving the sale of goods or services on credit, providing a structured framework for payment and trade. On the other hand, a promissory note is more appropriate for individual lending arrangements, personal loans, or informal credit agreements, facilitating clear repayment terms between the lender and the borrower.

<a href="https://www.skydo.com/blog/guide-for-tech-exporters-on-global-compliance?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Regulatory compliance</a> is essential when handling bills of exchange formats involving stringent legal requirements and documentation practices.

The bill of exchange is crucial for managing credit, fostering trust, facilitating international trade, providing financing opportunities, and offering legal protections. Thus, it streamlines complex financial transactions and contributes to the smooth functioning of global trade networks.

By integrating a bill of exchange into their operations, businesses can enhance their financial flexibility, minimize risks, and foster stronger relationships with their trade partners, thereby ensuring a seamless and secure exchange of goods and services on a global scale.

Q1. What do you mean by a bill of exchange?

Ans: A bill of exchange is a written order from one party to another, directing the second party to pay a specific sum of money to a third party on a specific date or demand.&nbsp;

Q2. What are the legal provisions regarding bills of exchange?

Ans: The negotiable instruments law of a specific country typically governs the legal provisions for bills of exchange.&nbsp;

Q3. Who is an acceptor of a bill of exchange?

Ans: An acceptor of a bill of exchange is the individual or entity formally agreeing to honour the obligation stated in the bill. The acceptor assumes the primary liability for paying the specified amount indicated in the bill, either on a fixed date or upon demand.

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With the introduction of online payments, both you and your clients have become more comfortable with digital payments in the last few years. But if you have to pay Rs. 5 lakh to a supplier today, what payment mode should you use: NEFT or RTGS?

You frequently encounter two seemingly similar yet distinctly important methods in the complex web of financial dealings. But are they just interchangeable acronyms, or do they <a href="https://www.skydo.com/blog/how-you-can-streamline-international-transactions-for-your-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">streamline your financial operations</a>?

This question is best answered by understanding the difference between NEFT and RTGS.&nbsp;

NEFT (National Electronic Funds Transfer)

National Electronic Funds Transfer (NEFT) is an Indian nationwide payment system that allows individuals to transfer funds online from one NEFT-enabled bank to another. The Reserve Bank of India introduced the payment system in November 2005 as a digital alternative to depositing money in someone else’s bank account at a bank branch.&nbsp;

Previously, there were several restrictions on the timings of money transfers through NEFT, which the RBI removed by updating the payment system in November 2019. Now, individuals can transfer money through NEFT 24x7 and 365 days a year.&nbsp;

We need some basic information to conduct any RTGS or NEFT transaction

Here are some features and characteristics of financial transactions executed through NEFT:&nbsp;

Financial transactions made through NEFT have a minimum transfer limit of Rs 1. RBI has not set any maximum limit for NEFT transactions but a per-transaction limit of Rs 50,000 for cash transactions. However, there is no upper limit on the total amount individuals can transfer using the NEFT facility.&nbsp;

This means you can transfer as much money as you want, but you must limit the amount to Rs 50,000 per transaction and use multiple transactions to transfer money above Rs 50,000. However, few banks have set their own maximum daily limit on the amount you can transfer using the NEFT facility.&nbsp;

There are no transaction charges for the recipient of funds sent through the NEFT facility. Individuals who execute financial transactions through NEFT online also don’t have to incur any money transfer fee. However, if you are initiating an NEFT fund transfer offline by visiting the bank, it may charge the following (these costs vary depending on the bank and type of account:&nbsp;

Real-Time Gross Settlement (RTGS) is a nationalized electronic fund transfer system used by Indian banks and financial institutions to execute time-sensitive and high-value transactions. Financial transactions executed through RTGS are considered the safest among payment systems as the transactions are done in real-time and in full rather than in batches.&nbsp;

The term ‘gross’ in Real-Time Gross Settlement (RTGS) signifies the payment execution process done individually without offsetting and netting against other transactions. Individuals can transfer money through RTGS 24x7 and 365 days a year. The <a href="https://www.skydo.com/blog/real-time-tracking-of-international-payments?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">real-time payment</a> process ensures that the financial transactions are highly secure and independent of other financial transactions.&nbsp;

Here are some features and characteristics of financial transactions executed through RTGS:

RTGS transactions are meant for high-value transactions, and the RBI has set the minimum RTGS limit to initiate a transaction at Rs 2 lakh. RBI has not set any maximum limit for financial transactions that individuals can make through RTGS. However, banks may set their own upper limit for the maximum funds that can be transferred through RTGS in a single day.&nbsp;

There are no transaction charges for the recipient of funds sent through the RTGS facility. However, individuals making the payment through RTGS must incur a certain money transfer fee, which banks may adjust at their convenience. Mostly, RTGS transaction charges are around:&nbsp;&nbsp;

There are numerous differences between NEFT and RTGS based on their transaction processing speeds, minimum and maximum transaction limits, applicability for different types of transactions, etc.

The major difference is the settlement type. Let’s say you have to transfer Rs. 2,50,000 to your supplier. If you send it by RTGS, your bank A will send it to their bank B, and they will receive it almost immediately.

However, if you send it through NEFT, then Bank A will block these funds from your account. At the end of the settling window, they will check if Bank B owes them any money. If Bank B has to pay them Rs. 1,00,000, Bank A will only transfer Rs. 1,50,000 to them. This ‘netting’ of what one bank must give vs what they have to get is the core mechanism of an NEFT transaction.

Here are the key differences between NEFT and RTGS: 



Understanding the key differences between NEFT and RTGS is the best way to understand which payment mode suits you best.

If you want to transfer money lower than Rs 2 lakh without the urgency of instant settlements, you can use NEFT online as it offers a free-of-cost way. For example, if you are a freelancer and want to transfer or receive fees of Rs 40,000, you can opt for NEFT as a <a href="https://www.skydo.com/blog/cut-international-transaction-costs?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">cost-effective way</a>.&nbsp;

On the other hand, if you want to make high-value transactions higher than Rs 2 lakh, it is beneficial to ensure that the payment is settled instantly and in full. You can opt for RTGS as the payment mode in such a case. For example, if you want to execute a business transaction, which is generally high-value and above Rs 2 lakh, you can opt for RTGS, as it will instantly confirm a fund transfer. It is deemed that on such a large amount, you will be comfortable incurring the cost of RTGS payments.

Money transfers are one of the most critical aspects for any business, whether as a freelancer or an entrepreneur. Facilities such as NEFT and RTGS have made it easier for customers nationwide to send and receive payments anytime and with the utmost security.&nbsp;

It is common for individuals making payments lower than Rs 2 lakh to use NEFT, while individuals looking to transfer funds higher than Rs 2 lakh choose RTGS. However, it entirely depends on your business type and the urgency of financial transactions’ settlement to make an informed choice between NEFT and RTGS. That being said, if you want to receive international funds in foreign currencies, look no further than <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a>. With a Skydo payment platform, you can <a href="https://www.skydo.com/blog/seamless-payment-experience-with-international-bank-accounts?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">open an international bank account in just five minutes</a>.&nbsp;

Q1.&nbsp; Which mode of payment, NEFT or RTGS, is faster?

Ans: When compared based on their settlement speeds, RTGS is a faster mode of payment as it settles the funds in full and instantly. On the other hand, NEFT takes around 30 minutes for payment settlement and settles them in batches.&nbsp;

Q2. Is it compulsory to have an Indian bank account to transfer funds through NEFT and RTGS?

Ans: Yes, you need to open a bank account with an Indian bank and opt for Internet banking to transfer funds through NEFT and RTGS online.&nbsp;

Q3. What security measures are in place for NEFT and RTGS transactions?

Ans: The Reserve Bank of India has made it mandatory to create a beneficiary before making payments through NEFT and RTGS for extensive security. The bank requires you to enter the recipient's bank account details, such as the recipient's name, bank and branch name, account number, and IFSC code. The bank matches and cross-checks the details for utmost security.&nbsp;

Q4. Can I reverse a transaction made through NEFT or RTGS?

Ans: No, you can not stop or reverse a payment once made through NEFT and RTGS. However, you can inform the bank immediately if you have sent the money to the wrong recipient. In fact, if the bank finds some mismatch in the account name and number details, they shall reverse the transaction by themselves, too.&nbsp;

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The traditional banking experience was a revolution upon discovery. However, the integration of technology in banking has resulted in the need to continuously innovate to make the entire transacting experience easier.&nbsp;

Imagine a financial world where you have the power to mix and match services from various providers, creating a truly personalised banking experience. Enter open banking – the current revolution in the financial industry where the talks around the utilities, possibilities, and risks associated with open banking are reaching a fever pitch.

Open banking attempts to break the monolithic structures of conventional banks and institutions and bring a ‘mix-and-match’ of services from multiple financial providers catered to the consumers. It is a system where customers can securely share their financial data with authorised third-party service providers through APIs to allow greater collaboration and foster the development of innovative, tailored financial solutions.&nbsp;

Open banking shifts the focus of financial services from a single-bank model to a collaborative approach. It helps securely and effectively <a href="https://www.skydo.com/blog/make-data-driven-business-decisions-with-customer-level-revenue-analysis?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">leverage consumer data</a> to foster an ecosystem based on data portability and interoperability.&nbsp;

This article aims to address some of these opportunities in the context of cross-border payments and international banking.&nbsp;&nbsp;

Open Banking and Global Payments: Bridging Distances

When expanding globally, businesses face major constraints while navigating payment cultures in different countries. For instance, corporate credit cards are most prevalent in the US, but most of Europe relies on wire transfers.&nbsp;

Payments through ACH (Automatic Clearing Houses) can take days to get authorised. The constant back-and-forth between multiple banks and clearing houses painfully limits and slows the process. There are also specific regulatory abidance for each country that businesses need to adhere to.&nbsp;&nbsp;

Open banking makes it possible for fintech services to serve customers at their homestead. It addresses the fundamental problems in traditional payment mechanisms and eases bank-to-bank payments. It automates manual processes to help customers authorise payments in a few clicks.&nbsp;

Open banking further cuts the fluff involved in <a href="https://www.skydo.com/blog/benefits-of-multi-currency-accounts?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international banking transactions</a> to help businesses attain global growth.&nbsp;

For instance, assessment, interchange, and processing fees cost<a href="https://www.bankrate.com/finance/credit-cards/merchants-guide-to-credit-card-processing-fees/"> 1.5% to 3.5% of every credit card transaction</a> to merchants in 2020. Open banking cuts out the intermediaries and directly connects customer’s bank accounts. This arrangement saves considerable time and costs for businesses with slimmer margins.&nbsp;

Open Banking: A Pathway to Financial Innovation

Earlier, customers were at the mercy of the banks. Most of the banks provided similar services, often limited in nature. The open banking framework has turned the tide in favour of customers. Fintech service providers compete to build a wide range of products and services that deliver a stupendous experience, ease of use, transparency, and cost efficiency.&nbsp;

Stripe and Braintree have disrupted the payment scenario by granting access to the underserved. In China, WeChat and AliPay are the new digital finance ecosystems serving customers based on their needs.&nbsp;

UPI and mobile wallets are among India's biggest use cases for domestic payment solutions based on open banking. In the US, large banks have struck data-sharing deals with third-party providers. Chase partnering with Intuit and Wells Fargo with Xero and Finicity are a few examples.&nbsp;&nbsp;&nbsp;

Customer Empowerment Through Open Banking

Open banking further empowers customers through data ownership and control. Fintech startups, technology companies, and financial institutions are synergising their efforts to enhance the overall customer experience by leveraging banking data.&nbsp;&nbsp;

Customers can enjoy seamless transactions, personalised financial insights, and transparent pricing frameworks while fully controlling with whom they share their financial data and to what extent.&nbsp;

APIs allow seamless integration of financial services such that businesses get a personalised suite of services for international dealings and cross-border payments. Many fintech service providers provide the dual benefit of the ease and simplicity of bank transactions and cutting-edge services like e-wallets, easy remittances, and currency exchanges.&nbsp;

In fact, the focus of such services and platforms is to provide their customers with the best user experience and innovative financial solutions. Yet, the pressing question remains about the regulatory and security aspects of this revolutionary banking avenue.

Regulatory Navigation in the Open Banking Era

Most apps and platforms based on open banking are built on robust security protocols and comply with their country's stringent data protection regulations. The General Data Protection Regulation (GDPR)&nbsp; is an important EU law that governs data sharing.&nbsp;

PSD2, another set of data protection rules in Europe, explicitly grants the authority to share data to account holders instead of banks. India also passed its new data protection bill in the recently concluded monsoon session. Many regional <a href="https://www.skydo.com/blog/mastering-compliance-a-step-by-step-guide-to-data-protection-payments-laws-and-industry-regulations-for-tech-exporters?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">regulatory frameworks</a> mandate consumer protection and privacy to the highest degree.&nbsp;

Third-party service providers need to ensure compliance at multiple levels as different data requires different levels of security. Data sharing is mostly risk- and permission-based in financial services. It must have proper audit trails per the regulations and risk management guidelines.&nbsp;

Fintech services can follow enhanced KYC procedures, identity validation, and fraud detection for compliance and regulatory adherence.&nbsp;

Addressing the Risks: Security in Open Banking

Open banking is based on data sharing of personal and sensitive information. Securing such information is the elephant in the room, which needs addressing. It poses risks in the form of increased exposure and vulnerability of data toward potential breaches, frauds, misuse, and hacks.&nbsp;&nbsp;

Fintech services and platforms must implement robust security measures and data protection guardrails such as encryption, monitoring, authorisation, and authentication. Measures such as two-factor authentication, KYC norms, dedicated <a href="https://www.idenfy.com/blog/best-age-verification-software-providers/">age verification tools</a>, AML solutions, and in-built security walls enhance data protection and eliminate manipulation or tampering.

The Horizon of Open Banking: Glimpse into the Future

<a href="https://assets.kpmg.com/content/dam/kpmg/ua/pdf/2019/09/future-of-digital-banking-in-2030-cba.pd.pdf">A KPMG report</a> states the banking industry will see more changes in the next decade than it has in the past 100 years.&nbsp;

The Integration of IoT (Internet of Things) and AI (Artificial Intelligence) with open banking, powered by<a href="https://www.antino.com/blog/custom-ai-solutions"> custom AI solutions</a>,&nbsp; will help customers embark on a journey of autonomous financial experiences. Fintech services and banks will have a greater insight into their customers’ lives, which calls for greater trust and robust security mechanisms. New business models and use cases for financial services will emerge to redefine the service provider-customer relationship.&nbsp;&nbsp;

Consolidation of services into a ‘super app’ will occur as AI and other emerging technologies interface with open banking solutions. AI will play a critical role in helping customers overcome their low levels of financial literacy. Technologies such as IoT and Distributed Ledger Technologies (DLT) will create trustless models of customer engagement and automation in financial services.&nbsp;

Businesses need to accept the change if they seek growth and relevance readily. Along with this technology adoption, IT exporters and international businesses need to be at the forefront of compliance and security to provide their customers with the best experience and smoothly functioning business processes.&nbsp;&nbsp;&nbsp;

Currently, the world relies on heterogeneous modes of payments, and abiding by all can get time-consuming and expensive for small-scale IT exporters and businesses. Open banking is revolutionising the banking sector and creating opportunities for businesses to grow globally.

Furthermore, cross-border payments are expected to reach<a href="https://www.bankofengland.co.uk/payment-and-settlement/cross-border-payments#:~:text=The%20value%20of%20cross%2Dborder,trillion%20in%20just%2010%20years."> $250 billion by 2027</a>. Consequently, the need to smoothen the creases and bumps in the international payments process is more pertinent than ever.&nbsp;

Fintech solutions like <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a>, driven by open banking, will be crucial in building and streamlining collaborative <a href="https://www.skydo.com/blog/seamlessly-accept-international-payments-in-india?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international payments</a> infrastructure from scratch.

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India has witnessed an impressive surge in its startup ecosystem in recent years. Factors such as a large and diverse consumer base, a burgeoning middle class, access to talent, and increasing investor interest have contributed to this growth. Indian startups are making strides in various sectors, including technology, e-commerce, healthcare, and fintech.

As this ecosystem continues to evolve, Indian startups are poised to play a pivotal role in shaping the future of India and the global business landscape.

<a href="https://www.skydo.com/blog/what-are-capital-and-current-account-transactions?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Current accounts</a> play a pivotal role in the financial operations of businesses, including startups, for several reasons:

Now, imagine you're the founder of a promising startup in its early stages. Your venture is fueled by ambition, innovation, and a grand vision. However, in these initial phases, your resources are limited, and you're carefully managing every rupee going in and out of your company. By design, current accounts don't pay any interest and hence shouldn’t ideally charge any fee or have a mandatory Minimum Account Balance (MAB). However, some current accounts impose a high MAB.

In such a scenario, a Zero Balance Current Account (ZBA) becomes an invaluable asset and an indispensable financial tool.

Introducing Zero Balance Current Accounts

In the nascent stages of a startup, every penny counts. A ZBA allows you to operate your business with minimal financial constraints. You don't need to maintain a substantial minimum balance, which means you can invest your limited funds in growing your business rather than locking them in a bank account.

It removes the financial burden, provides flexibility, and enables financial inclusion.

A Chartered Accountant of a fintech startup with such an account explained, “Most startups keep their money in an overnight fund which earns them ~6% interest and conveniently transfer the funds from it to a zero balance account just when they need to disburse them.”

Steps for Zero Balance Current Account Opening Online

Follow these steps to open a zero-balance current account.

The specific steps would differ depending on the financial institution.

Documents Needed to Open Zero-Balance Current Account Online

The specific documents required to open a zero-balance current account online may vary depending on the bank or the financial institution. However, here is a list of common documents that are typically requested when opening a zero-balance current account online:

Does your business need a Zero Balance Current account?

It is not compulsory to have a zero-balance current account because the monthly average balance requirement is not very high in non-zero-balance accounts. For instance, a <a href="https://www.hdfcbank.com/content/bbp/repositories/723fb80a-2dde-42a3-9793-7ae1be57c87f/?path=/Personal/Save/Accounts/Current%20Account/Premium%20Current%20Account/Non-Managed-Plus-Premium-Regular-Leaflet.pdf">regular current account</a> in the HDFC Bank requires you to keep an average quarterly balance of ₹10,000 on non-metro locations and its non-maintenance can cost ₹1,500.&nbsp;

But any money saved is equivalent to money earned. This part is vital for the following reasons.

Advantages of Zero-Balance Current Account

While zero-balance current accounts offer several advantages, they also come with certain challenges and considerations that businesses should know.

Zero-balance current accounts offer a compelling array of advantages that can significantly boost businesses' financial accessibility, cost efficiency, effective cash flow management, financial inclusivity, and streamlined operations.

You must choose a correct business account that helps you smoothen your daily operations with utmost efficiencies, and the least cost and zero balance current account can be a great starting point.

Q1. Can zero-balance current accounts support high transaction volumes for growing businesses?

Ans: Yes, one of the strong suits of a zero-balance current account is its ability to support high transaction volumes for growing businesses.

Q2. Are there any limitations or fees associated with zero-balance current accounts that businesses should be aware of?

Ans: Some zero-balance current accounts can impose limits on the number of free transactions or the total transaction amount within a specific period. Exceeding these limits can result in additional charges. While monthly maintenance fees for zero-balance current accounts are often lower than traditional accounts, there may still be fees for certain additional services.

Q3. How can businesses ensure they choose the right bank for their zero-balance current account needs?

Ans: One of the best ways to ensure the right bank for their zero-balance current account needs is to seek recommendations from their business networks and do your research, feature comparison, assess fees, and review customer support.

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Several businesses attempting to tap into the global market face obstacles with cross-border payments such as high transaction fees, long processing times, and a lack of transparency. Despite the challenges, the potential is undeniably vast.&nbsp;

A <a href="https://home.bluesnap.com/cross-border-payments-guide/">survey</a> has projected that the value of all global payments will reach an astounding $250 trillion by 2027.&nbsp;

But how can businesses navigate these major complexities of cross-border transactions and tap into this potential? The experts behind the architecture of <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a> have considered these challenges and built a platform that can make your life easier.

Let’s say you secured a deal with a US-based client. You’re excited about the new opportunity, completed the work, and now it’s time to <a href="https://www.skydo.com/blog/transforming-your-invoicing-experience-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">raise that invoice</a>. However, when the amount reaches your account, a major chunk of it is deducted from the fees associated with international transactions.&nbsp;

<a href="https://www.skydo.com/blog/get-the-most-out-of-your-forex-savings-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Currency conversion</a>, wire transfer, and other transaction fees can add up quickly.&nbsp;

They can even become a significant expense at the business’s bottom lines. Moreover, with a payment gateway, there are further charges, such as commission fees for each transaction. It’s like trying to fill up a leaky bucket - no matter how much money he pours in, Sanjay can’t seem to make it stay.

According to a <a href="https://home.bluesnap.com/cross-border-payments-guide/">survey</a>, 68% of business owners potentially pay unnecessary high transaction fees.

#Solution 1: A Flat Fee for every transaction

Payment method like Skydo simplifies and streamlines business payments with a flat fee structure for all transactions, eliminating unexpected fees and allowing for easy cost calculations and budgeting. This means you will pay the same price, regardless of the transaction size, which can help you save time and money.&nbsp;

If you’re providing services to a US-based client, and the exchange rate between USD to INR is unfavourable, your client will have to pay more to buy the same goods or services from your business. This can make your services less competitive, and the US client may look for cheaper alternatives.&nbsp;

But, let’s say, the client does pay the amount to you for the work done. You will need to negotiate with a financial institution for the best exchange rate despite the benchmark rate being higher.

Skydo offers businesses competitive <a href="https://www.skydo.com/blog/forex-and-its-impact?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">FX rates</a> with zero margins for cross-border transactions, helping you save money and avoid hidden costs. Instead of negotiating with banks or FX providers, businesses can conveniently make transactions on the platform at favourable rates. This eliminates time-consuming negotiations and ensures efficient and cost-effective foreign exchange transactions.

#Problem 3: Complex Regulatory Requirements

International payments involve a range of challenges related to tax and regulatory compliance.&nbsp;

<a href="https://www.skydo.com/blog/how-can-the-right-chartered-accountant-help-your-tech-export-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Finding the right CA</a> and utilising an effective payment channel can be helpful to avoid penalties or fines related to tax and to address these regulatory compliance challenges.

Skydo automates FIRA generation, eliminating the need for manual document creation and management. Our platform ensures compliance with Indian tax laws and you can conveniently download all FIRAs with just one click from our dashboards, saving time and reducing the risk of errors.

Higher commission for quicker disbursement

Some payment channels charge businesses higher commission fees for expedited payment disbursement. This can be particularly challenging for small businesses that rely on timely cash flow to maintain operations.&nbsp;

<a href="https://www.linkedin.com/in/dianarajkumari/">Diana Rajkumari</a>, Director at <a href="https://www.linkedin.com/company/dimarkus/">Dimarkus</a>, explains, “Finding the perfect balance between speed and cost-effectiveness has been a major challenge for us as we seek to receive payments from our global clients for a small company like ours. While traditional banks are slow and expensive, some fintech providers offer quicker transfers but at the cost of poor exchange rates.

Compare that to other companies such as Skydo provide a convenient way to transfer money to India from other countries. They offer flat transaction fees at competitive exchange rates and speedy transfers.”

Traditional <a href="https://www.skydo.com/blog/eefc-account-vs-payment-platforms?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">payment gateways</a> involve multiple intermediaries, which can cause transparency issues in foreign payments. Businesses often face unclear costs and difficulty tracking the process due to the involvement of various intermediaries. As a result, hidden costs may arise, negatively impacting the business's profits.

Cross-border payments with Skydo will hit your bank account instantly. There are no commission fees or hidden charges in any way.

We help streamline payments by creating local bank accounts in various countries, making transfers quick and effortless.&nbsp;

Here are the steps to streamline payments for businesses:

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