Savvy business owners are constantly on the lookout for ways to maximize profit and minimize expenses. Often, you can increase revenue by keeping cash in an account with high annual percentage yield (APY) In this article, we’ll examine a few types of business accounts that can keep your finances secure and earn a higher return on cash reserves.
When you think of an account that earns APY, a high-yield savings account, money market fund, or a certificate of deposit (CD) probably come to mind. These accounts offer competitive interest rates, but may have minimum deposit requirements or withdrawal restrictions. Alternatively, you could look for a business bank account that offers a high APY, an often overlooked strategy to passively increase revenue.
Any of these accounts may be a good fit for your business. As you read on, think about your goals for saving and which account requirements you can easily meet to maximize the utility for your business.
Why should I have a high APY account?
APY refers to the real rate of return earned on savings and investment accounts when considering the effect of compounding interest. Unlike simple interest that’s calculated on the principal alone, compound interest is calculated on the principal and the accumulated interest.
While standard business savings accounts have an interest rate of less than one percent, a high APY account might earn upwards of four percent. Over time, even a small increase in interest rates can result in significant additional earnings.
For example, if you put $100,000 into an account with a 0.6% APY, you would earn approximately $3,036.22 over 5 years. In a high-yield account with a 4.0% APY, you would earn $21,665.29 over the same period.
So if you have any savings kept in reserve, it could be working that much harder for your business.
6 types of high-yield accounts
Several beneficial high-yield business bank accounts are available for small business owners. The best ones for you will depend on the needs of your business.
However you choose to earn on your savings, be sure to check that the account is FDIC-insured, so you can protect your money in case something goes wrong.
High-yield business savings accounts
A basic high-yield business savings account offers the most competitive rates with lower opening deposits and fees. Deposit requirements can be as little as nothing, or only around $100.
One potential downside to a high-yield business savings account is that traditional brick-and-mortar banks rarely offer them—so many business owners turn to online banks or financial service companies. For many business owners, online banking is more convenient. Be sure to check if the account is FDIC-insured. If it is, you can rest assured your money will be safe.
Another downside is that you may not have as much freedom when it comes to money movement options, which could make things unnecessarily complicated when you need to move funds around to pay bills or make a big business purchase. This is why many businesses use business checking accounts that offer high APY—so they can earn interest on their operating balances without needing to move money around constantly. (More on this below.)
Money market accounts (MMA)
A money market account is similar to a savings account but has similar features to a business checking account. Many financial institutions issue debit cards or paper checks with their MMAs to provide easy access to your MMA funds. Some business owners find this beneficial because it helps free up their working capital.
Money market accounts are available at both brick-and-mortar banks and online financial institutions. You’ll usually find the best rates with online banks because they often offer higher interest and charge lower fees.
However, MMAs usually require a higher opening deposit, ranging from a few hundred to a few thousand dollars. There may also be a limit on how many withdrawals you can make in a set time, depending on the financial institution.
Certificates of deposits (CDs)
A CD, or Certificate of Deposit, is one of the best APY accounts for long-term savings, usually offering more interest payoff than a typical high APY savings account. However, a CD should only be used when you can commit to keeping your money in an account until the CD term ends, usually in three months to five years. If you withdraw funds early from a CD, you will likely need to pay an early withdrawal fee. One good thing about CDs is they typically have no monthly fees.
You can overcome a CD’s early withdrawal penalty by building a CD ladder. A CD ladder involves spreading your cash over multiple short and long-term CDs, which expire at different times, meaning you’ll always have the option to withdraw on the horizon.
Here’s how building a CD ladder works:
Let’s say you have $20,000 earmarked for a high APY account. To build a ladder, you take $4,000 and invest it in a one-year CD, $4,000 and invest it in a two-year CD, $4,000 and invest it in a three-year CD, and so on. Then, as each CD matures, you can put the money and interest earned into a new, longer term CD.
This will allow you access to the shorter term CDs as they mature while building additional longer term savings with the five year term CDs. You can also choose to renew mature CDs at a shorter term or any amount of time you like.
By creating a CD ladder and reinvesting over longer terms, you can build sustainable capital to cover projects or re-invest into your business growth.
Cash management accounts (CMA)
A CMA is another type of hybrid account with features typical of checking, savings, and investment accounts.
An online non-bank financial provider typically offers CMAs and has lower interest rates when compared to other high-interest APY accounts. However the rates are often still competitive compared to standard interest-earning business accounts.
Cash management accounts typically have no withdrawal limits and low fees. However, CMA providers aren’t usually FDIC-insured, a major drawback for many business owners who want to safeguard their cash. Do your research. A reputable CMA provider will hold your money with a bank. Make sure this bank is FDIC-insured, and understand how or if this can apply to your CMA.
Specialty savings accounts
Specialty savings accounts allow you to put money away for specific needs such as retirement, health expenses, or a child’s future (for instance, a college savings account). These specialized accounts include HSAs, IRAs, custodial accounts, and student savings accounts. These can be great long-term investments for your excess business funds, so you can plan for a future goal, such as retirement.
The interest rate for each type of account will vary, and some will restrict withdrawals. It’s essential to research an account’s withdrawal rules before opening. You should also look to make sure the investment institution is insured by the FDIC.
High-yield business checking accounts
A high-yield business checking account is similar to a traditional business checking account. The main difference is that the APY you can earn is higher than a standard business bank account, sometimes much higher than the national interest rate average.
Having your money in a high APY business checking account means you don’t have to move money between accounts when you need working capital.
Some financial institutions have criteria businesses must meet to qualify for a high-yield business checking account. These include a minimum account balance and requirements on the number of transactions you make each month. There may also be other requirements, depending on the financial institution.
The interest rate can vary based on the federal funds rate, and it can often change without notice. However, the rate will frequently remain competitive with the market, and you’ll be free to withdraw or spend money as you need as long as you maintain the minimum required balance.
Many business owners benefit from putting money into an account with a high APY. By earning interest on extra funds, you can make your money work harder for your business.
If you’re interested in opening a high yield account, be sure to do your research. Make sure you understand any balance requirements and check that the institution you deposit with is FDIC-insured.