Since money is the cardinal fuel that keeps a business running, where you store it matters. With choices abound, picking the right type of bank account is not too different than searching for the right home- it needs to keep your money safe, help it flourish and hit all the right boxes on your checklist.
There are several types of bank accounts available catered to businesses, but most are derivatives of these two basic types- a business checking account and a business savings account. Both come with their strengths and weaknesses, but they also work seamlessly together.
In short, storing your capital in a business checking account keeps it safe and easily accessible for an unperturbed cash flow cycle. A business savings account, however, is more suitable for storing funds and having it accrue interest as it matures.
The best option for you depends on a variety of factors like the size of your business, the size of your cash reserve and your financial goals.
In this article, we are going to take an in-depth look at a business savings account, and how your business can benefit from having this type of account.
Typically when businesses start making higher profits, they can opt to place that extra fund in an account that rewards them for saving which is the purpose of a business savings account. Every business needs a contingency plan to tackle unforeseen financial liabilities or bigger purchases in the future. Businesses with surplus capital they don’t have an immediate need for can store the excess in this interest-bearing account, and have it grow independently.
It’s not mandatory for a business to have a savings account of course, but they should because in case of a financial need that’s difficult to meet, it becomes an excellent alternative to taking a loan or exhausting the funds in the primary checking account. That said, a business savings account is not designed to be a working account, but rather an additional source of funds that you can find financial solace in when you need to.
When you deposit money into a savings account, you allow the bank to borrow that money and lend it out to others who take a loan from them. The bank, in turn, offers you a little interest in letting them lend out that money.
Although compared to other interest-bearing accounts like Certificates of deposits or treasury bills, a business savings account offers you a more modest interest rate. There are some online banks, though, that offer a higher interest rate than traditional brick and mortar banks, and that’s because they don’t have to cover expensive overhead costs associated with a physical bank.
The money in this type of account earns compound interest. Depending on the offer you choose, your account can earn an interest either daily, monthly or quarterly. You will also earn interest on interest. The amount and rate your money grows, then, depends on the frequency of the interest added.
When you shop around, you will notice that the Annualized Percentage Yields (annual rate of return based on compounding interest) you get with many banks is around 1% interest rate, with most offering well under that. It might seem like low returns, but a savings account isn’t meant to replace your main retirement fund or be the primary fund for everyday capital business needs. Instead, it’s meant to help you when your business faces unexpected costs like a possible acquisition, new employee hires, equipment upgrades, covering bills and payrolls on a slow sales phase, etc. Rather than accumulating more debt, you can turn to your savings instead. It's essentially there to act as a hedge for when you have a sudden need for cash.
Savings account are liquid but not as liquid as checking account. The perk of liquid assets is that they are easily accessible, which means that if you have bills to pay and you have exhausted all your other financial reserves, you can easily turn to the funds in your savings account to get that taken care of. That said, every bank has its own restrictions related to the minimum balance required, transaction limits and the number of withdrawals allowed over a specific period, etc. For example, the Federal Reserve only allows 6 transactions or withdrawals per calendar month on certain types of transfers.
But these little bits of restrictions help you avoid spending money that is meant to be saved. With features like withdrawal penalties and minimum balance requirements, a business savings account is inherently designed to block funds from draining out so easily. And it also inspires frequent and consistent cash allocations into the account.
That said, the funds in your savings account are more liquid and have lesser restrictions than certificates of deposits or money market accounts. So your business can save money while also still being liquid to cover unforeseen expenses.
Most bank deposits made by businesses of all sizes, both for-profit or non-profit, into a business savings account are covered by Federal Deposit Insurance Corporation (FDIC).
For a business savings account to be eligible for FDIC coverage, it has to meet these two requirements:
Image source: FDIC.gov
It’s important to protect your funds, and with FDIC, you can get up to $250,000 covered. Banks are highly unlikely to fail but it does happen, like in the Financial Collapse of 2015, 8 banks failed, and during the Great Recession even more banks went under. But no account holder lost even a single insured dollar from their savings account because of FDIC. You don’t have to pay FDIC for coverage, your bank does.
Opening your business savings account with an FDIC-insured bank can shield your hard-earned savings in case there is an economic collapse, while also making sure that your business always has a reliable source of funds for rainy days. Use this BankFind tool to quickly check if the bank institution you are looking to open your business savings account in is FDIC approved.
Having a business account linked to your savings account under the same bank institution can protect against those pesky overdraft fees. Businesses have to deal with payments going in and out of accounts to vendors and clients every day. If accidentally there is an oversight and a larger transaction is made than what's available in your account, you can rely on the savings account to cover that overdraft fee.
Also, when your checking account funds hit lower than the required minimum, you can combine part of your balance from your business savings account to your checking account to cover the difference. Having your business avoid paying fines like this every week and month can eventually help save your business a lot of money.
Taxes are one of those necessary evils of running a business that isn’t fun to deal with but is very important. On top of that, failing to make the required tax payments throughout the year, increases your chances of having to pay back taxes when April rolls around. All of these unplanned expenses can catch you off-guard and force you to shift your focus and funds from major business operations to handling tax penalties.
Having a source of trusted funds secured and build up in your business savings account is a surefire way to be better prepared to pay off all your tax debts promptly to avoid thousands of dollars worth of legal expenses in the future.
Not just for business but also for retirement. As a business owner, you are constantly faced with expenses- some planned and others, not so much. Having a Business savings account, where you have enough funds to keep your business operating smoothly for 6-8 months in an event where your business performance doesn’t go as planned, or sales take a hit will make sure that your business…stays in business, and that you can keep all your attention fully focused on the more important matters like increasing your cash flow, rather than worrying about how to pay the bills.
If you do decide to sell your business before retirement and find that during evaluation your business is worth less than what you expected it to be, having this stored up fund will make sure you have something to fall back on as an added security, and your nest egg won’t be impacted too much.
It will even prevent that urge to sell your business off to the first buyer that shows interest, just for quick cash, even if their offer isn’t anywhere near what you were expecting.
Now that you know why it's absolutely critical that your business should look into getting a business savings account, let’s move on to the next important question:
How much you should set aside in your business savings account really depends on your business. Aim to save at least 10% of the profits you make every month, with having up to 6 months worth of operating expenses in reserve. This is especially true if your business is a seasonal one that mostly receives the majority of profits over just a few months. You should aim to have enough funds in your savings account to cover your passive sales months when revenue is low. But that is not a hard rule since the specific amount will really depend on your business.
Here are 2 questions to ask yourself that will help you figure out how much to save:-
Take a look at the cash flow of your previous months; specifically, look at the funds coming in vs. your expenditures. This should help you glean the major expenses that you definitely need to spend on, for example- rent, wages, insurance, equipment, and utilities. Then roughly take into account any near future expenses you will be having, for example, one-time conference ticket expenses, advertising fees, etc.
This spending forecast will help you zero in on how much you can actually afford to stash into your savings without hindering your business operations.
Are you running a startup, or is it a more established business that has been seeing consistent profits for years? If it’s a startup that is still in its growing phase, you will have to take into account the funds you need to fuel the growing phase. In this case, it may not be practical to reserve all the incoming cash, and it would be more sensible to invest the profits right into your startup to fuel growth. But you can still always find ways to put some money aside into your savings account to avoid barely making it by hand to mouth. On the other hand, as an established business, you will have less uncertainty to face and will be able to remit more funds into your savings.
This number influences how much you can make on your money over the course of a year with compound interest. When it comes to your Business Savings account, a higher APY is always better since you are the one earning interest.
To give your savings an opportunity to grow, you have to ensure that the bank doesn’t hit you with penalties that you didn’t know about because just a few of these fines can leech away all the interest you have earned in your funds. Some of the fees to look out for include:
As mentioned earlier in this article, check to see if the bank you are setting up your account with is FDIC insured. This doesn’t cost you extra, but it will give your funds added security if something unexpected were to happen to the bank.
An efficient business is the sum of a variety of different operations running smoothly, and money is what often fuels them all. So, opening a business savings account should be part of every business owner’s long-term investment strategy to make sure you have a reliable source of this fuel to reach into when the need arises. Sure, it isn’t the most lucrative investment option, but it’s the most basic and reliable way to secure excess funds to cover unanticipated costs that you, as a business owner, can never be over-prepared for.