Despite current economic uncertainty, 72% of U.S. small businesses intend to grow their operations this year, according to Goldman Sachs. But even more of them—81%—report finding it difficult to access capital, which underlines the urgent need for small businesses to build up savings to ensure their security and growth.
The ability to manage cash flow is key to business success. A well-thought-out business banking strategy can provide a safety net during lean times and a buffer against unforeseen expenses or economic downturns.
Read on to learn why and how to save, the types of accounts available and their benefits and what to look for in a financial institution for business banking.
Companies with surplus capital should store the excess in an interest-bearing business savings account and let it grow. Savings are an excellent alternative to taking out a loan or exhausting funds in the business checking account.
Having cash put away can assist your business in several ways:
A general rule of thumb is to save at least 10% of your monthly profits, and ideally set aside three to six months' worth of operating expenses. This guideline is especially true if your business is seasonal and receives most of its profits over a few months.
There are a number of other factors to consider when planning how much to save:
Once you've estimated how much to save, consider what type of savings account is right for you.
Most business savings accounts are either business savings accounts or business money market accounts. Both are considered low-risk deposit accounts, divorced from market fluctuations and federally insured up to the allowable limits.
In both instances, you make deposits at a branch, by ACH or bank transfers, via ATM or via remote deposit capture or mobile deposit. The differences lie in how you access money, the accounts’ restrictions and how much interest you’ll earn.
Business savings accounts are not designed as working accounts that you can access with checks or debits, but for saving money you may need to access quickly. These accounts typically have lower interest rates than money market accounts, but also usually come with a lower minimum opening deposit and monthly balance requirement.
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 contributions are inconsistent.
Unlike savings accounts, money market accounts (MMA) give you immediate access to your money via check writing or debit card privileges. Business MMAs typically have higher interest rates than savings accounts, though the minimum deposit amount may also be higher. You can expect to deposit between $500 and $5,000 when opening an MMA. Tiered interest rate structures are common, so the more you deposit, the more you earn.
MMAs may be the best option for more established businesses with a relatively large cash reserve.
Opening a business savings account has some distinct benefits, from organizing your business finances to better preparing for emergencies.
Maintaining a clear separation between your operational funds in your checking and savings accounts can help your business avoid unnecessary spending. With funds marked for specific purposes in your savings account, such as taxes, equipment upgrades or expansion plans, you reduce the temptation to dip into those reserves for day-to-day expenses.
A business savings account offers you a more modest interest rate than other interest-bearing accounts. But a savings account isn't meant to replace other investments or be the primary fund for everyday capital. Instead, it's intended to help with unexpected costs, and business savings accounts typically offer higher interest rates compared to standard checking accounts.
The money in a savings account is easily accessible. Every bank has restrictions related to the minimum balance required, transaction limits and the number of withdrawals allowed over a specific period, but the funds in your savings account are still more liquid and have fewer restrictions than certificates of deposits or money market accounts.
With your business checking and savings accounts connected, you can use the savings account as a buffer in case your checking account dips below the minimum balance required to avoid fees or overdraft charges. This can save your business money, enabling you to worry less about keeping tabs on spending in real time.
Most money up to $250,000 in business savings accounts is covered by the 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
Banks are unlikely to fail, but it does happen, with potentially devastating results. Opening your business savings account with an FDIC-insured bank can shield your hard-earned savings in case of an economic collapse.
A business savings account is a convenient place to build an emergency fund and save for taxes. Having readily accessible cash reserves can help your business weather unexpected expenses, such as equipment breakdowns, dips in revenue or opportunities that require quick capital. It can also help you save enough to make the required tax payments throughout the year, reducing your chances of having to pay back taxes and fines when you file.
Once you're ready to open a business money market or savings account, consider the annual percentage yield, any restrictions on the account, fees you will be required to pay and whether the bank is insured by a federal agency.
Annual percentage yield influences how much you can make on your money over a year with compounded interest. Look for a bank or credit union that offers competitive rates.
Savings accounts often come with some restrictions, such as a minimum balances you must maintain or how often you can transact in a given period. Make sure the account you choose has requirements that fit your business.
Check to see if the account will require you to pay fees. Just a few of these unexpected fees can take away the interest you have earned on your funds. Some common fees include:
An efficient business is the sum of various operations running smoothly, and money often fuels them. It’s a good idea to open a business savings account, as this should be part of every business owner's long-term investment strategy. It is the most basic and reliable way to secure excess funds to cover unanticipated costs while you keep risk low and earn interest on your savings.
We can help you determine the best savings account for your business. Review our business savings solutions or speak with an advisor at your local Seacoast branch.
Topics: Small Business, Financial Management
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