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As a business owner, you know that it’s important to optimize your cash reserves and take advantage of passive income whenever possible. One way to accomplish these goals is by exploring high-yield business savings options.
Two of the most popular high-yield business savings options are certificates of deposit (CDs) and money market accounts. Both financial tools provide opportunities for businesses to earn more interest than with standard savings accounts and to do so with minimal risk and varying degrees of liquidity.
How do you know which high-yield business savings option will work best for your business? At Riverview Bank, we want to support our clients every step of the way in their financial journeys, so we’ve put together some helpful information below about how each of these options works. We’ve included details about the benefits and limitations of each and some tips on choosing the right one to maximize returns while maintaining necessary financial flexibility for your business.
What Is a Certificate of Deposit (CD)?
A CD is a type of savings account, but it has some key differences from a traditional savings account. With a regular savings account, you can typically access the money at any time and deposit additional funds regularly. When you open a CD, on the other hand, you deposit a single lump sum and agree to leave it in the account, unused, for a set period of time (also known as the term).
During that time, which can range from a few months to up to five years, your financial institution pays you a fixed interest rate that is usually higher than you would get with a traditional savings account. Longer terms usually yield higher interest rates than shorter terms. It’s the benefit of leaving your money untouched for an agreed-upon period.
Once the CD matures at the end of the set term, you can withdraw the full amount or choose to reinvest the money in a new CD or other financial product. If you need to withdraw funds before the end of the term, you will typically pay some sort of penalty fee, so it’s important to consider when you might need the funds before deciding on the term length.
What Is a Money Market Account?
As with CDs, money market accounts are savings accounts that often pay higher interest rates than more traditional savings accounts. Unlike CDs, however, money market accounts do not have fixed term limits. They also pay a variable interest rate, rather than a fixed interest rate, that can change with market conditions.
Money market accounts do not require you to leave your money in the account for a certain term. In fact, many come with debit cards or checks to make it easier for you to access your funds as needed. This means you can withdraw money without risk of penalty. Note that, while there is no fixed term, certain restrictions may apply, such as a limited number of transactions per month.
Greater flexibility and liquidity make money market accounts an attractive option for many businesses, but keep in mind that they might also require a higher minimum balance than a regular business savings account.
Benefits and Limitations of CDs
Because the Federal Deposit Insurance Corporation (FDIC) insures the funds in CDs and because the interest rate is fixed, CDs are a predictable investment with very low risk. They may be a more attractive option than riskier investments, like stocks and bonds.
Higher interest rates allow you to earn more passive income from your funds, and the minimum balance is often lower than for money market or other savings accounts.
However, since you cannot access the funds without penalty, CDs are less flexible and best used for surplus funds that you do not need for operational expenses. If you need to save money for a specific business expense that you know is coming up, CDs might be a good choice.
Benefits and Limitations of Money Market Accounts
Money market accounts are also FDIC-insured, which makes them a lower-risk investment opportunity as well. However, because the interest rate fluctuates, the interest you earn on a money market account is less predictable than with a CD.
Having easy access to the funds in a money market account means they are great for emergency or short-term operational reserves. Your business will still be earning higher interest rates but enjoying greater liquidity and flexibility, as long as you can maintain any minimum balance requirements the account may have.
Strategic Tips for Business Owners
When choosing the most appropriate high-yield business savings option for your situation, consider the following strategic tips:
Compare Rates and Fees
Explore your options at several different financial institutions, including banks, credit unions, and online lenders. Pay close attention to any hidden fees that might apply for maintenance, dropping below a minimum balance, excess transactions, early withdrawal, and so on.
Ensure Appropriate Insurance Coverage
Always make sure your financial institution of choice is insured either by the FDIC or NCUA (for credit unions). The standard coverage limit is $250,000 per depositor, per investment type, per financial institution, so if this amount doesn’t cover all your funds, you might consider opening accounts at more than one financial institution to ensure full coverage.
CD Ladder Strategy
If you want guaranteed returns over a specific time frame but also want to maintain some access to your funds, you could split funds into multiple CDs that have staggered maturities (for example, 3, 6, and 12 months). Once each CD matures, you can either use the funds for operational costs or reinvest them. This strategy provides you with periodic liquidity while still taking advantage of higher interest rates and the predictable returns of CDs.
High-Yield Business Savings Options at Riverview Bank
High-yield business savings options like CDs and money market accounts can be effective tools in the cash management strategy for your business. Riverview Bank has several FDIC-insured, high-yield business savings options to consider to help you grow your business with ease. Contact us by phone or online, or stop in at your local branch if you have questions or want to find out more about your options. We would love the opportunity to work with you.