Businesses and personal accounts differ. This is why you need to know whether you need a Nodal, escrow and current account for your small business.
The internet era has shifted businesses online. For online small businesses running an e-commerce platform, money moves across different networks. From customers to vendors, partners etc, e-commerce payments are a complex process.
This is why your business will need a nodal, escrow or current account.
A Nodal, escrow and current account help businesses handle the complex payments that online businesses take care of. Nodal and escrow accounts are used to hold third-party amounts for settlements.
What is Nodal account?
A Nodal account is a special purpose account, mandated by the Reserve Bank of India, used by businesses that act as intermediaries. An intermediary business is one that collects money online from customers on behalf of the vendors.
- In India, a nodal account holds third party amounts for settlements.
- Businesses can create nodal accounts through specific nodal banks.
- Nodal accounts act as a temporary vault to store and distribute money to merchants.
- You cannot withdraw cash from this account.
Why do small businesses need a nodal account?
Nodal account enforces the ‘trust factor’ for businesses when it comes to timely payouts. Since small businesses have multiple networks that money will be paid out to, Nodal accounts ensure timely payouts to all vendors, keeping in sync with the payment cycle. Instamojo is a nodal account.
Fortunately, you do not need to go through the long process of opening your own nodal account if you have an account on Instamojo. All you need to do is create an account on the website, integrate your payment gateway and your payouts will be taken care of.
What is Escrow account?
An escrow account is a temporary pass-through account held by a third party on behalf of the other two parties (buyer and seller) during a transaction, until it is completed.
The escrow (arrangement) holds the funds until it receives written or oral instructions or until the obligations of the party involved are fulfilled.
Escrow accounts can be opened with any bank. An escrow account is usually applicable for businesses engaged in real estate.
Features of an escrow account:
- A temporary account as it operates until the completion of a transaction process.
- Escrow account reduces the risk involved when a buyer is completely unknown to the seller.
- Escrow account payouts are transparent and secure – this helps keep a better record of transactions and eases the auditing process.
Why does a small business need an escrow account?
An escrow account is very useful with large volume transactions. An escrow account consists of pre-requisites all parties must meet.
For example, a buyer might want quality assurance of the product before making a payment, and the seller doesn’t want to extend a work without any assurance that he or she will receive payment.
What is Current Account?
A current account is the most common business account. Therefore, businesses that carry out large volume bank transactions use current account to carry out transactions.
Features of a current account:
- A current account is a bank account for easy business transactions. Businesses will not earn any interest from this account.
- No limit on the number of transactions with current account for small businesses
- Businesses can overdraw the balance to meet your short term fund requirements.
Why do businesses need a current account?
If your small businesses engage in large payments on a regular basis, then a current account is ideal for your business. Also, you can use your current account for reflecting your business income and related expenses. This is an ideal way to segregate your business and personal finances.
Also, a current account boosts your business creditworthiness. Cheque book facilities, internet banking and mobile banking are the basic and common services that you get with each bank account. Finally, current bank accounts offer benefits such as:
- Free pay orders/demand drafts
- Instant NEFT/RTGS facilities
- Multi-location transfers
- Free inward remittance
If your business has not made up its mind yet, we recommend creating an account of Instamojo. It is simple, and you receive your payouts on time, always. We have also introduced faster payouts for your business to meet its daily goals.
Check out our detailed guide here on how to collect payments online with Instamojo.