What is an escrow account and Hot Money?
Understand what a guaranteed account and Hot Money are, their main advantages and costs involved
Announcements
Guaranteed account and Hot Money are very important terms for those who have their own business.
Anyone who runs a company has certainly thought, at least once, about what should be done in the event of financial problems.
This thinking is quite common, as the finance sector of a company, regardless of its size, has control over the planned cash inflows and outflows.
The problem is that in some situations, this is not enough to meet potential cash flow needs.
For emergency situations like these, there are two solutions: guaranteed account and Hot Money.
If you want to know more about the subject, continue reading.
What is an escrow account?
The guaranteed account is an account with a revolving limit, designed to meet cash flow needs.
Generally, the maximum term is 360 days.
And this account is nothing more than a parallel account to your business's current account.
Therefore, when we say that an entrepreneur decided to use this resource, it means that he uses an extra account.
The objective is always to obtain better development conditions and increase the company's chances of growth.
After opening a guaranteed account, your business will have a line of credit (fixed amount) available, so that it will be possible to pay off business debts.
How does the secured account work?
There is no doubt that an escrow account is a great solution for businesses.
This resource provides credits so that businesses can carry out different types of activities, such as:
• Get your accounts up to date
• Pay employees’ salaries
• Hire new professionals
If you wish to request this support, the first step is to look for a financial agent with experience in the matter.
This professional will analyze your company's situation and advise you on what you need. This way, they will be able to recommend a good financial institution that truly offers advantageous conditions for your business.
When the contract is finalized, your company will receive the cash amount in the “new account”.
Is it worth using a guaranteed account?
The credit may be used to meet all financial obligations within a given period.
You will receive the money quickly in your account, making the guaranteed account an even more advantageous option for those who need money in the short term.
Furthermore, interest is only charged on the last day of the month, and IOF (Tax on Financial Transactions) on the first day of the following month.
However, there are some disadvantages involved.
The first of these is the additional IOF charge on the amount requested for withdrawal.
In fact, if withdrawals are not well planned, the IOF charged may even exceed the interest on the transaction.
Furthermore, it is important to remember that we are talking about a loan, not the company's own financial resources. In other words, the credit must be repaid within the defined term and with the amount of the charges.
What are the costs of the escrow account?
There are three costs that the company will have to bear:
• CDI rate
• Pre-fixed interest rate (charged per business day)
• IOF
What is the difference between a guaranteed account and an overdraft?
The guaranteed account and the special check actually work in a relatively similar way.
However, there are some considerable differences between the two types of loans.
The main difference between them is that the guaranteed account is a separate account. Furthermore, it does not operate automatically, as with an overdraft.
For this reason, it is necessary to request a transfer from the guarantee to the current account.
What is Hot Money?
Hot Money is also a type of very short-term bank credit.
It is granted very quickly to customers with previously approved credit. In fact, its release is almost always immediate.
In fact, the term Hot Money, or hot money, in Portuguese, is used precisely because of the ease of obtaining credit, which usually involves large amounts of money.
The problem is that interest rates are very high, precisely because of the urgency and lack of planning in raising funds.
The financial resources obtained through loan can be used in any way the consumer wishes, since the creditor will not ask for any proof of how the resources will be invested.
How does Hot Money work?
Companies that apply for this type of loan are those that need money as quickly as possible.
After all, the money is released very easily and quickly.
It is required when there is an almost immediate need to pay bills, increase cash flow in the short term, or provide working capital to keep the company running.
Interest rates are higher than other types of loans.
Is it worth using Hot Money?
Hot money is an emergency tool for those who need money as quickly as possible.
This means that its main advantage is to help companies quickly raise funds for cash flow.
But obviously, all this agility comes at a high cost. Certainly, high interest rates are the main disadvantage of this type of loan.
Because it is an easier form of credit, the interest rates end up being quite high. Furthermore, the payment terms are shorter.
For this reason, it is best for your company to only use Hot Money in urgent situations. In these cases, this type of loan can really help!
What are the costs of Hot Money?
This type of loan is based on the CDI (Interbank Deposit Certificate) rate in effect on the day of the transaction.
It is also important to mention that the fee is increased by the credit risk of the transaction and the turnover (spread) of the transaction.
Conclusion
Now you know two more types of loans that can be used by your company.
It is important to remember that these operations must be carried out in very specific cases, such as improving working capital and expanding the business!
