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CD vs Saving Account: Your Small Business Savings Options

Great news: your small business is making enough money that you can start saving for the future. But where should you put that extra cash?

Certificates of deposits (CDs) and savings accounts are both safe and reliable options for earning interest on your money. A savings account offers easy access to your cash, while a longer-term CD allows you to earn a slightly higher interest rate in exchange for promising to keep your money in the account until it matures.

The best account for you depends on your financial goals and liquidity requirements, so let’s consider the pros and cons of each.

Savings accounts: pros and cons

A savings account is a business bank account that allows you to earn interest on your deposits. The interest rate you’ll earn will vary based on the federal funds rate set by the Federal Reserve. You can open a business savings account at the same financial institution where you have a business checking account or at another bank or credit union.

Savings accounts generally require minimal cash upfront. The minimum deposit required varies from bank to bank, but some accounts have no minimum opening deposit at all.

A business savings account gives you a financial cushion. Whether you’re faced with an emergency expense or a short-term cash crunch, having a savings account ensures you have some cash to survive without putting more of your own money into the business or taking on business debt.

When you should choose a savings account

It’s best to use a savings account when you think you may need to access your money because you can withdraw the funds at any time, without penalty. That makes a traditional savings account a good option when you want to save for an emergency, save for taxes, or for a large purchase you plan to make in the next few months.

Before you open a business savings account, consider the following factors:

  • Annual percentage yield (APY). APY is the amount of interest you earn on a deposit account over one year, assuming you don’t make any additional deposits or withdraw funds for the entire year. It includes your interest rate plus the compounding interest on previous earnings. Because it takes compound interest into account, comparing APYs can be more valuable than comparing interest rates between different accounts.

  • Fees. Many banks waive monthly fees for business savings accounts if you maintain a minimum balance. Make sure you can comfortably afford to keep at least the minimum in the account. Otherwise, those fees can quickly wipe out any interest earned.

  • Promotions. Some banks offer introductory bonuses when you open a new account. These promotions typically require you to deposit a minimum amount and maintain a minimum balance for a certain period, such as 60 or 90 days. In exchange, the bank deposits a bonus into your account at the end of the period. Promotions shouldn’t be your primary incentive for choosing a particular bank or financial institution, but they can provide a nice perk if you plan to open an account anyway.

  • FDIC insurance. The Federal Deposit Insurance Corporation (FDIC) helps protect consumers from losing money due to bank failures by insuring certain types of accounts, including savings accounts and CDs. The FDIC insures up to $250,000 per person, per bank. The National Credit Union Administration (NCUA) provides insurance for accounts at credit unions. Like the FDIC, the NCUA has a $250,000 cap for each account and owner.

Things to keep in mind

Business savings accounts can be a safe and convenient option for stashing your surplus cash, but there are a few disadvantages.

  • Low interest rates. Financial institutions pay very low rates on savings accounts. According to the FDIC, as of July of 2021, the national average interest rate on savings accounts was just 0.06%. At that rate, if you deposit $5,000 into a savings account and made no other deposits or withdrawals, you would only have $5,003 at the end of one year. You may be able to find higher rates with high-yield savings accounts offered by online banks. Because online banks have lower overhead costs than brick-and-mortar banks, they usually pay higher APYs.

  • High minimum balance requirements. Depending on the bank or credit union rules and the type of account you open, your business savings account may have high minimum balance requirements. If you don’t keep the minimum required balance, the bank may charge a monthly maintenance fee, assess a penalty, or even close your account. So make sure you know how much you need to keep in the account to avoid fees and penalties.

  • Interest rates aren’t locked in. Unlike CDs, banks don’t lock in your interest rate when you open an account, which means the rate you earn can change depending on the market and the bank.

  • Transaction limits. You can make an unlimited number of deposits into a savings account each month, but some banks restrict the number and types of withdrawals allowed each month. For example, your bank may limit the number of withdrawals you can make at ATMs or over the phone. Exceed the limit, and the bank may charge you additional fees.

Further Reading: How to Open a Business Bank Account

Certificates of deposit: pros and cons

A CD is a type of savings account offered by banks and other financial institutions that allows you to earn a fixed interest rate. Although interest rates can fluctuate, you’ll usually find that CD rates offer higher interest than savings accounts. However, in exchange for that higher rate, you agree to leave your deposit untouched for a certain amount of time — usually anywhere from one to 60 months.

On the agreed withdrawal date, also known as the maturity date, you can withdraw your original deposit, plus any interest you earned.

When you should choose certificates of deposit

It’s best to use a CD when you know you won’t need to access your money until the maturity date. Some of the best features of CDs include:

  • Fixed interest rates. Interest rates can fluctuate daily—even hourly—so the returns on certain investments can be unpredictable. A CD locks you into a fixed interest rate, so your money grows dependably, regardless of any changes in market interest rates.

  • Better returns. CD accounts usually offer higher rates than savings accounts, and the longer the CD’s term, the higher rate you’ll receive. According to the FDIC, for July 2021, the national average rate on a one-month CD was just 0.03%, but the average rate for a 60-month CD was 0.26%.

  • Security. Like savings accounts, CDs offered by banks are FDIC-insured, and the NCUA insures those offered by credit unions. This gives you some peace of mind that your money is safe.

  • Variety. Depending on your bank or credit union, you may have several types of CDs to choose from. Some financial institutions offer no-penalty CDs that allow you to withdraw your money at any time at no cost (in exchange for lower interest rates). Some banks offer bump-up CDs that allow a one-time increase in your rate, bringing it to the rate your bank is currently offering on new CDs. You can request this bump up any time before the maturity date.

Things to keep in mind

There are some disadvantages to saving for your business in a CD, including:

  • Less flexibility. If you need to withdraw your funds before the maturity date, the bank will deduct an early withdrawal penalty from your deposit (assuming you don’t have a no-penalty CD).

  • Low returns. While CDs tend to offer higher rates than savings accounts, their rates are still lower than many other investments. If your goal is growth, you may be better off investing in indexed funds or exchange-traded funds (ETFs).

  • Automatic renewals. Some CDs automatically renew on their maturity date unless you tell your bank or credit union not to renew it. Keep an eye on your maturity date, or you may end up locking your money in a CD for longer than you planned. Plus, the interest rate for the new CD isn’t guaranteed to be the same rate as your current CD — it could be higher or lower.

If you like the idea of saving with a CD but don’t like the idea of tying up all of your savings long-term, consider CD ladders. A CD ladder allows you to purchase multiple CDs with different maturity dates rather than lumping all of your cash into one CD.

CD vs savings account: which is right for you?

If you’ve made it this far and still feel lost, here’s a handy side-by-side comparison of the two savings accounts:

Feature Certificate of deposit Savings account
Flexibility Penalty for withdrawing before maturity date Withdrawals can be limited by number and type
Interest rates Fixed for the CDs term Variable
Deposits Initial deposits only Unlimited
Minimum balance Vary Vary
FDIC/NCUA insurance Yes Yes

Ultimately, the choice between CD vs savings account comes down to how soon you will need the money.

If you already have a business emergency fund and still have cash to spare, a CD may make more sense because you’ll earn a higher rate of return. However, if you need quick access to your cash to cover an emergency or temporary cash shortage, a savings account is better because you won’t have to pay a penalty to withdraw your money.

Before you put your money in one place, figure out your savings goals and how much you might need for emergencies. After considering your goals and short-term cash needs, you’ll be better equipped to choose between a CD and a savings account.

Whether you choose a savings account, CD, or both, always look for the best rates before you commit. Interest rates and APYs can vary greatly from bank to bank, so it’s worth your time to shop around for the best rates you can find.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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