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 from searching for the right home. It must keep your money safe, help your business flourish and meet all your checklist requirements.
Since money is the cardinal fuel that keeps a business running, it is essential to have excess cash available.
A well-thought-out savings strategy can provide a safety net during lean times and buffer against unforeseen expenses or economic downturns.
But how much money should your business have in savings? What type of account should you keep your profits in?
A business savings account allows you to place your excess funds in an interest-bearing account that offers a set percentage return.
Every business needs a contingency plan to tackle unforeseen financial liabilities or more significant purchases in the future.
Companies with surplus capital that they don't need immediately can store the excess in an interest-bearing business savings account and let it grow independently.
A business isn't required to have a savings account. However, if a financial need is challenging to meet with regular cash flow, it becomes an excellent alternative to taking out a loan or exhausting funds in the primary business checking account.
A business savings account is not designed to be a working account but rather an additional source of funds for financial solace when needed.
Aim to save at least 10% of your monthly profits, with 3-6 months' operating expenses in reserve.
This is especially true if your business is seasonal and receives most of its profits over a few months. Companies should aim to have enough funds in their savings accounts to cover their low-revenue sales months.
Having expendable cash put away can assist your business in more ways than one, including:
Ask yourself these two questions if you're looking for the precise amount your business should save each month.
Look at your previous months' cash flow, explicitly comparing your revenue to your expenses. This will help you understand the significant costs you must pay, such as rent, wages and insurance.
Then, consider any near-future costs, such as one-time conference expenses, advertising fees, etc. This savings forecast will help you narrow down how much you can allocate to your savings without hindering your business's everyday operations.
The stage of your business naturally affects your cash flow and your ability to save comfortably. Is your company an established business with years of profit, or are you running a startup?
If a startup is building a foundation, consider the funds you need to fuel the increasing phase. In this case, reserving all the incoming cash may not be practical, 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 allocate more funds to your savings.
Compared to other interest-bearing accounts, certificates of deposits or treasury bills, a business savings account offers you a more modest interest rate. Your account can earn interest daily, monthly or quarterly, depending on your offer. You will also earn interest on interest. The amount and rate of your money growth depends on the frequency of the interest added.
When you look for a business savings account, 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 other long-term business investments or be the primary fund for everyday capital business needs.
Instead, it's intended to help you when your business faces unexpected costs, such as a possible acquisition, new employee hires, equipment upgrades and covering bills and payrolls during a slow sales phase.
Rather than accumulating more debt, you can turn to your savings. They're essentially there as a hedge for when you suddenly need cash.
Liquid assets 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 account.
However, every bank has restrictions related to the minimum balance required, transaction limits and the number of withdrawals allowed over a specific period. For example, the Federal Reserve only allows six transactions or withdrawals per calendar month on certain types of transfers.
But these restrictions help you avoid spending money meant to be saved. With features like withdrawal penalties and minimum balance requirements, a business savings account is inherently designed to prevent funds from draining out quickly.
Still, the funds in your savings account are more liquid and have fewer restrictions than certificates of deposits or money market accounts. So your business can save money while still being liquid and covering unforeseen expenses.
Most bank deposits made by businesses into business savings accounts are 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
1. Corporations, partnerships or unincorporated associations must be separately organized under state law and operate primarily for purposes other than increasing deposit insurance coverage.
2. All deposits owned by a corporation, partnership or unincorporated association at the same bank are added together and insured separately from the owners' or members' personal accounts up to $250,000.
Protecting your funds is essential; you can get up to $250,000 covered with FDIC.
Banks are unlikely to fail, but it does happen, like in the Bank Crisis of 2023, in which various high-profile banks collapsed. Even more banks went under during the Great Recession. However, no account holder has 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 confirm whether the bank institution you are looking to open your business savings account is FDIC-approved.
A business account linked to your savings account under the same bank can protect against overdraft fees. Businesses must deal with daily payments going in and out of accounts to vendors and clients.
If a more significant transaction is made than what's available in your business account, you can rely on the business savings account to cover that overdraft fee if necessary. Additionally, if your checking account funds reach below the required minimum threshold, you can combine part of your balance from your business savings account with your business 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 you file in April.
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 secured source of funds readily available in your business savings account will better prepare you to promptly pay off any tax debts and avoid significant legal expenses in the future.
Your business savings provide extra protection for your current business and your retirement. As a business owner, you are constantly faced with planned and unplanned expenses.
If your business performance doesn't go well or sales take a hit, having savings will ensure that your company stays in business and that you can focus on increasing cash flow.
If you decide to sell your business and find that during evaluation, your business is valued less than you expected, having this extra cash will ensure you have something to fall back on.
It can also help you resist the urge to sell your business to the first buyer, even if their offer isn't close to what you expected.
Business savings accounts typically offer higher interest rates compared to standard checking accounts. By depositing excess funds into a savings account, your business can earn more interest on its excess cash, increasing overall returns without taking on additional risk.
Maintaining a clear separation between your operational funds in your checking account and savings 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 is a convenient place to build an emergency fund. Having readily accessible cash reserves can help your business weather unexpected expenses, such as equipment breakdowns, dips in revenue or unexpected opportunities that require quick capital.
Keeping a buffer in your business savings account prevents your checking account from dipping below the minimum balance required to avoid fees or overdraft charges. This can save your business money that would otherwise be spent on penalties for insufficient funds.
Businesses can use savings accounts strategically for tax planning. By setting aside funds for tax payments, businesses can ensure they have the necessary funds available when taxes are due, potentially avoiding penalties or interest charges for late payments.
Depending on the jurisdiction, interest earned on the savings account may be tax-deferred or tax-free, providing additional savings.
Now that you know the benefits of a business savings account and how they can help you achieve more expendable cash, let's consider factors when choosing the best one for your business.
APY influences how much you can earn with compound interest over one year. A higher APY is always preferred for your business savings account.
To profit from your savings growth, you must ensure that you don’t get hit with penalties. Unfortunately, these fines can draw away all the interest you have earned. Some of the fees you could be charged for include:
1. Monthly maintenance fee
2. Withdrawal Fee for going over the stated limit
3. Overdraft fee
4. Paper statement fee
5. Annual and minimum balance fee
6. ACH and wire transfer fee
7. Account inactivity fee
8. Minimum balance requirements
As mentioned in this article, check 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 the bank experiences an unexpected event.
By choosing a local bank, you're supporting the economic growth and stability of the community you serve and reside in. Local banks, like Seacoast, provide personalized customer service with team members who understand the community's unique needs.
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 is 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. Plus, you can earn interest on your savings, furthering your business's growth.
Want to learn more about your business savings options? Review our business savings solutions or speak with an advisor at your local Seacoast branch.
Topics: Financing
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