Since money is the cardinal fuel that keeps a business running, where you store it matters. With so many available options, picking the correct 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 have their strengths and weaknesses, but they also work seamlessly together.
Storing your capital in a business checking account offers safety and accessibility for an unperturbed cash flow cycle. A business savings account, however, is more suitable for storing funds and having them accrue interest as it matures.
The best option for you depends on various factors, like the size of your business, your cash reserve, and your financial goals.
In this article, we will take an in-depth look at a business savings account and how your business can benefit from this type of account.
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 more significant purchases in the future. Companies 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.
A business doesn't need to have a savings account, of course. Still, 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. However, a business savings account is not designed to be a working account but rather an additional source of funds in which you can find financial solace 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 interest in letting them lend out that money.
Although compared to other interest-bearing accounts, 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 your offer, your account can earn interest daily, monthly, or quarterly. You will also earn interest on interest. The amount and rate your money grows depends on the frequency of the interest added.
When you shop around, you will notice that the Annualized Percentage Yield (annual rate of return based on compounding interest) you get with many banks is about a 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 leading retirement fund or be the primary fund for everyday capital business needs.
Instead, it's intended 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 accounts are liquid but not as liquid as checking accounts. The perk of liquid assets is that they are easily accessible, which means that if you have bills to pay and have exhausted all your other financial reserves, you can quickly turn to the funds in your savings.
Every bank has restrictions related to the minimum balance required, transaction limits, the number of withdrawals allowed over a specific period, etc. For example, Federal Reserve only allows six transactions or withdrawals per calendar month on certain types of transfers.
But these 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 quickly. And it also inspires frequent and consistent cash allocations into the account. Still, 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 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
Protecting your funds is essential, and you can get up to $250,000 covered with FDIC. Banks are unlikely to fail, but it does happen, like in the Financial Collapse of 2015, in which eight banks failed. Even more banks went under during the Great Recession. 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 of an economic collapse while ensuring 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.
A business account linked to your savings account under the same bank institution can protect against those pesky overdraft fees. Businesses must deal with daily payments going in and out of accounts to vendors and clients. If an oversight accidentally occurs and a more significant transaction is made than what's available in your account, you can rely on the savings account to cover that overdraft fee. In addition, if your checking account funds hit below the required minimum, you can combine part of your balance from your business savings account to your checking account to cover the difference.
Managing taxes is necessary for running a business but can be challenging, especially for new businesses. Failing to make the required tax payments throughout the year increases your chances of having to pay back taxes when April rolls around. These unplanned expenses can catch you off-guard and force you to shift your focus and funds from primary business operations to handling tax penalties.
Having a source of trusted funds secured and built up in your business savings account is a surefire way to be better prepared to pay off all your tax debts promptly and avoid thousands of dollars’ worth of legal expenses in the future.
Not just for business but also retirement. As a business owner, you are constantly faced with expenses- some planned and others not so much. You should have a business savings account with enough funds to keep your business operating smoothly for 6-8 months in case of an emergency. If your business performance doesn't go as planned or sales take a hit, having savings will ensure that your business stays in business and that you can keep all your attention focused on increasing your cash flow rather than worrying about how to pay the bills.
Should you 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. Your nest egg won't be impacted too much. It will even prevent the urge to sell your business to the first buyer who shows interest, just for quick cash, even if their offer isn't near what you expected.
Now that you know why your business must 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 depends on your business. Aim to save at least 10% of the profits you make every month, with up to 6 months' worth of operating expenses in reserve. This is especially true if your business is seasonal and receives most of its profits over a few months. In addition, aim to have enough funds in your savings account to cover your passive sales months when revenue is low.
Here are two questions to ask yourself that will help you determine how much to save:
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 significant expenses you need to spend on, for example- rent, wages, insurance, equipment, and utilities. Then roughly consider any near future costs, for example, one-time conference ticket expenses, advertising fees, etc. This spending forecast will help you zero in on how much you can 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 a startup is still in its growing phase, you will have to consider the funds you need to fuel the increasing 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 into your startup to fuel growth. On the other hand, as an established business, you will have less uncertainty to face and can remit more funds into your savings.
This number influences how much you can make on your money over 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 allow your savings to grow, you have to ensure that the bank doesn't hit you with penalties you didn't know about. Unfortunately, just a few of these fines can draw 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 set up your account with is FDIC insured. This doesn't cost you extra, but it will give your funds added security if something unexpected happens to the bank.
An efficient business is the sum of various operations running smoothly, and money is what often fuels them all. Opening a business savings account should be part of every business owner's long-term investment strategy. It may not be the most lucrative investment option. Still, 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.
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