Business CD: What It Is and How It Works

What Is a Business CD?

A business certificate of deposit (CD) is a type of term savings account. Business CDs work the same as any CD you might open with your personal money: You choose the term length, make an opening deposit, and leave your money in the account until the term ends. In return, you get access to a higher interest rate than you can typically get with a regular business savings account. 

That’s the basic idea, but there are a few important things to know in order to use business CDs most effectively in your business.

Key Takeaways

• A business CD works the same way as an individual CD for your personal finances does. 
• Business CDs offer higher interest rates than savings accounts but charge penalties if you withdraw the money early. 
• Business CDs are a good way to save for future investments while limiting the impact of inflation on your funds.

How a Business CD Works

Business CDs are available in a range of term lengths, each of which offers a different annual percentage yield (APY). Generally, the longer the term length, the higher the interest rate, but that’s not always the case. Choose a term length that matches when you’ll need the funds because if you withdraw your money too soon, you typically have to pay an early withdrawal penalty. 

You’ll also need to commit a minimum deposit amount, often $1,000 or higher. You can’t add funds once you’ve opened the CD, so you’ll need to choose your deposit amount wisely. Some banks may require higher deposits for business CDs than personal CDs, but that’s about the only difference between the two. 

The more you deposit, the more interest you’ll earn. Some banks and credit unions offer jumbo business CDs if you deposit $100,000 or more, often paying an even higher rate for these deposits. Remember, though, your deposits at any given bank or credit union are typically only protected up to $250,000 by the FDIC (for banks) or NCUA (for credit unions).

Important

You can buy and sell brokered CDs through brokerage accounts as you can with investments, but these carry more risks and aren’t the same as buying a business CD directly from a bank on your own.

Your business CD will mature at the end of its term. Most banks and credit unions will automatically renew the CD for a new term length. If this happens, you’ll have a brief grace period—lasting about 7 to 14 days—during which you can withdraw the money penalty-free. If you don’t do something with the funds yourself, they’ll likely auto-renew into another CD. If so, you’ll have to wait until the CD matures again if you want to access your money without paying a fee. 

Pros and Cons of Business CDs

Pros

Business CDs might make sense if you’re looking for the following benefits.

• High interest rates: You can often earn a far higher rate on a business CD compared to a business savings account. Many banks even have promotional offers with exceptionally high rates on business CDs.
• Guaranteed returns: A business CD is a deposit account, not an investment, so your business funds are protected by federal insurance up to a limit of $250,000. Business CDs pay fixed rates, so you’ll know in advance how much you’ll receive at the end of the term. 
• Set-it-and-forget-it model: Rather than actively managing an investment, you can simply deposit the money in a CD and withdraw when it matures. A CD ladder strategy can be helpful, in which you open several CDs with different maturity dates. By opening separate CDs that mature and renew at regular intervals, you’ll earn high rates while maintaining frequent access to capital. 
• Time to consider investments: Locking your business money away prevents impulse spending. It gives you time to do market research and plan out your next investment so you’re ready to get started when your CD matures. 

Cons

On the other hand, consider these downsides and whether they outweigh the pros of business CDs.

• Inflation impact: Inflation in recent years has ranged from 0.1% to 8.0%. Business CDs may offer high rates, but they generally won’t be able to keep up in high-inflation years. You may earn more by investing your money, but that carries risks, too.
• Not as widely available: Personal CDs are a common offering from banks and credit unions, but it’s not as easy to find business CDs. You may have to open an account at a different bank from your regular financial institution.
• High minimum deposits: Business CDs lock away a significant portion of your business assets for months or years at a time. If you run into problems, you can still access that money, but not without paying a fee.
• Early withdrawal penalties: If your business needs the money you’ve set aside in a CD before it matures, it will usually cost money to access. Early withdrawal penalties typically equal a set amount of interest, and you may need to withdraw the entire CD.

Remember that the interest you earn on a business CD is taxable just like interest you earn on other deposit accounts. Chat with an accountant to see how to handle it for your business.

Business CD vs. Consumer CD 

Business CDs and consumer or personal CDs operate exactly the same way. The major difference is that some banks require a higher minimum deposit amount to open business CDs compared to personal CDs. These institutions may also offer higher interest rates for business CDs with larger deposit amounts. 

Business CD vs. Money Market Account 

Business money market accounts may also offer higher rates than business savings accounts in return for a larger minimum deposit amount. Their rates are typically not as high as those of CDs, though, because they’re not timed deposit accounts. 

You can access your funds in a business money market account without penalty, although you may be limited to a certain number of withdrawals per month. Getting ahold of your money may be fairly easy, too, with some banks offering a debit card or checkbook specifically for your money market account. 

Frequently Asked Questions (FAQs)

What Is the Average Rate for a Business CD?

Average business CD rates fluctuate over time, like rates for personal CDs. However, business CDs operate similarly to personal CDs, and the average rate for a personal 1-year CD is 1.88%. You can easily get a better rate than that, however, by checking out the current best rates for personal CDs.

What Is the Average Minimum Deposit for a Business CD?

Many business CDs require a minimum deposit of at least $500, with others requiring at least $1,000, similar to personal CDs. Some banks and credit unions may require a higher minimum deposit for business CDs. For example, Wells Fargo’s best business CD rates require a minimum deposit of $5,000. 

Can I Withdraw Early From a Business CD?

Yes, you can withdraw money early from a business CD, but you’ll generally need to pay an early withdrawal penalty. Some banks require you to withdraw the entire amount if you make an early withdrawal, whether or not you actually need the full deposit. 

Are Business CDs FDIC-Insured?

Business CDs opened at an FDIC-insured bank or NCUA-insured credit union are protected if the financial institution goes out of business. Your money is protected up to a combined level of $250,000 across all of your accounts held at that bank. Many banks and credit unions are federally insured, but it’s worth checking before opening an account.

Can You Lose Money on a Business CD?

If you open a business CD at an insured bank or credit union and you stay below the $250,000 coverage mark, you’ll be fully protected against any losses. Deposits above this amount are not protected, and it’s possible you could lose that CD money if the bank fails. Brokered CDs sold through investment firms may result in losses depending on market fluctuations, depending on when you withdraw, and in some cases, they may not be held at an insured bank. 

The Bottom Line

If you’ve been fortunate enough in your business to have extra funds, a business CD can be a great place to store extra capital while you develop a plan to use it later. It’s generally best if you know when you’re likely to need the money so you can choose the right term length. 

If you’re not clear on when you’ll need the funds, a more liquid account such as a business money market account or a business savings account might be more appropriate. 

Emergencies could happen at any time, after all, and you won’t want to pay the early withdrawal penalty on a five-year business CD to access the funds you need to keep your venture afloat. But for specific long-term investment goals, a business CD can be a great way to preserve and grow your capital. 

Read the original article on Investopedia.