Business Insights

A Small Business Owner’s Guide to Business Savings Accounts

The ability to manage cash flow can be a key component for what makes a business successful. Aside from internal challenges such as keeping your customer base happy and maintaining operations, small business owners must also account for external conditions like economic downturns and shifting consumer habits.  growthspurt1rev

Out of the 33.2 million small businesses in the US, an estimated 33% will struggle due to a lack of capital, which underlines the need for saving, even if it's minimal.

As a small business owner, it’s important to understand your savings account options, consider how much of your profits you should be saving and what to consider before opening an account. 

How Much Should You Have in Your Business Savings Account?

How much money to set aside in your business savings account depends on your business goals. In general, you should aim to save at least 10% of the profits you make monthly, with up to 6 months' worth of operating expenses in reserve to help carry you through unforeseen periods of slow growth, shifting consumer habits and unexpected expansion opportunities. This guideline is especially true if your business is seasonal and receives most of its profits over a few months. 

Other factors to consider are:

  • What stage is your business in?
    • If you are running a start-up you might need to focus on growth, which means using all or most of your profits to achieving stability
  •  How long will it take to replenish your savings if you spend it?
    • If it takes a significant amount of time to access more funds, you may find yourself pulling from operational cash flow just to make ends meet
  • If you need additional resources, consider how long it would take you to access the money
    • Depending upon the timeline, you may want to consider securing funding through a business line of credit, which would be a faster solution than sourcing additional investors – determine how long you can wait for the funding
  • How much cash do you have an immediate need for every month?
    •  Assess your operating costs, such as rent, utilities, and payroll and factor in any near-term future costs, such as one-time conference ticket expenses, advertising fees, etc. This spending forecast will help you zero in on how much you can afford to place in your savings without hindering your business operations

Once you've estimated how much you should be saving, consider what type of saving account is right for you.

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Two Business Saving Account Options

There are several savings accounts that cater to businesses, but most are derivatives of two basic types - a business money market account and a business savings account. Both account options are considered low-risk deposit accounts because your account balance isn’t dependent on market fluctuations, and funds are federally insured up to the allowable limits

 In both instances, deposits are made in a branch, by ACH or transfers from other accounts, via ATM, or at your place of business through remote deposit capture or mobile deposit

The account differences lie in how you’ll access the money, how much you’re depositing and how much you stand to earn on your account balances. 

Money Market Accounts

Great for: return on investment and easy access to funds 

Business money market accounts (MMA) typically have higher interest rates than traditional savings accounts, though the minimum deposit amount may also be higher. Business owners can expect to deposit between $500 and $5,000 at the time of account opening. 

In addition, tiered interest rate structures are common with money market accounts, which means the more you deposit, the more you'll earn.

Unlike savings accounts, money market accounts offer check writing or debit card privileges, which means you have the option to pay for expenses at the point of sale rather than first transferring funds into your business checking account or withdrawing money at the bank or ATM. 

Business Savings Account Money Market vs Savings (1)

Great for: Simplicity and saving for multiple goals

Interest rates may be lower, but business savings accounts typically have a lower minimum opening deposit and monthly balance requirement. There are no restrictions on the number of savings accounts a business owner can have, so it's possible to open multiple accounts for specific savings goals. For example, a business owner may have a savings account for office upgrades and one for emergencies.

Unlike a money market account with check-writing and debit privileges, a business savings account is not designed to be a working account but rather an additional source of funds to find financial solace when needed.

For business owners still working to stabilize their operations, traditional business savings accounts can be an excellent option for casually setting money aside, even if it's on an inconsistent basis.

If you know which account is right for your business, your next step is deciding where to open the account. Though how the two accounts operate likely won't change between financial institutions, the amount you make off your investments and fees associated with the accounts probably will.

What to Look for in a Bank

Once you're ready to open a business money market or savings account, consider the following:

The annual percentage yield, which is a number that influences how much you can make on your money over a year with compounded interest. When it comes to your account, look for a bank or credit union that offers competitive rates.

Check to make sure you won’t incur potentially expensive penalties through account fees. Unfortunately, just a few of these unexpected fees can take away the interest you have earned on your funds. Some common fees you may encounter include:
•    Monthly maintenance fee
•    Withdrawal fee for going over the stated limit
•    Overdraft fee
•    Paper statement fee
•    Annual and minimum balance fee
•    ACH and wire transfer fee
•    Account inactivity fee
•    Minimum balance requirements

In Conclusion

An efficient business is the sum of various operations running smoothly, and money is what often fuels them all. Therefore, opening a business money market or business savings account should be a consideration of every business owner's long-term investment strategy. Of course, there may be more lucrative investment options. Still, it's the most basic and reliable way to secure excess funds to cover unanticipated expenses. 

Regardless of which account is best suited to meet your small business needs, check to see if the financial institution you set up your account with is insured by the FDIC or NCUA. This assurance doesn't cost you extra and will give you peace of mind if they cease operations, and peace-of -mind is a valuable benefit as you focus on your business.

Want to learn more about your business savings options? Review our product solutions or fill out the form below to speak with your local advisor  

Topics: Financing


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