Cash is an asset that can be used to cover day-to-day business expenses, as a variable in calculating liquidity, or saved in a reserve fund to be prepared for the unexpected. Idle cash that is not earning interest or investment returns can become a liability. This is especially true when economic conditions are uncertain, or when we’re experiencing high inflation and a declining dollar.
Earning interest is one way to offset the declining value of cash. Two of the better options for business owners to accomplish this are a high-interest business checking account or a business money market account. Both are more liquid than a certificate of deposit (CD) and less volatile than a stock market investment. In this article, we’ll review what you need to know about money market accounts.
What is a money market account and how does it work?
A money market account is a hybrid bank account that offers many of the benefits of a savings account along with the ability to write checks and use a debit card. Money market accounts typically pay out a higher interest rate than regular business checking accounts, but your business may be required to maintain a minimum balance to qualify for that rate.
Money market accounts are appealing because they’re FDIC insured up to $250,000 per depositor. Equity investments don’t offer that same safety net. On the downside, money market accounts may also come with higher monthly fees, or the interest you earn could be tiered according to your average daily balance.
The Federal Reserve Board lifted the mandatory limit of six transactions per month back in 2020, but many banks still have that limitation on their money market accounts. Check on that before moving any money over to a money market account. Think of it as a “parking spot” for your excess cash. You can always keep that cash in a business checking account if you’ll need to move it around soon.
Pros and cons of a business money market account
We covered most of these in the sections above, but you should take another look at the pros and cons laid out in the simple-to-read table below. You’ll see that there are an equal number of advantages and disadvantages to depositing your money in a business money market account.
| Pros | Cons |
| Higher returns and interest rates | Potentially high minimum balance requirement or monthly fee |
| Low risk compared to stock market investment, covered by FDIC insurance | Monthly transaction limits—many banks still limit account holders to 6 per month |
| Funds are more accessible than in a CD and some business savings accounts | Temporary introductory rates and tiered interest rates based on daily balance |
What makes business money market accounts so low risk?
In the financial world, risk represents the likelihood that you’ll lose money. Low-risk investments are ones where you’ll take minimal or no losses. Money market accounts fall in that category. Your deposits are insured by the FDIC, and you’re guaranteed to receive interest on your money, though the rate of that interest may fluctuate based on your average daily balance.
Despite transaction limits, a money market account is still a good way to maintain liquidity for your company. Tying that money up in a CD or real estate investment makes it difficult to access it if you truly need it. That’s factored into the risk equation also. Storing cash in a money market account gives you access and a moderate return on your money,.
How to make the most of your idle cash
Cash in a business account should never be completely idle. Look for a business checking account with a decent annual percentage yield (APY) so your money can earn interest while it sits. A business money market account can be used as a place to park “extra” cash that you’re not likely to use for short-term expenses. Combining the two should produce a nice passive income stream.
Using the same bank for both your checking and money market account may be convenient, but the FDIC only insures up to $250,000 per depositor. You may want to find a bank that’s part of a sweep network to increase your FDIC coverage.
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