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Business Certificates of Deposit (CDs): How They Work

Learn about business certificates of deposit (CDs) and how they work to safeguard and grow a portion of your business's funds.

One way individuals can try to earn more interest on their money is by putting it in a certificate of deposit (CD). These investments sometimes pay more interest than a savings account, especially over longer terms.

If your business is looking to earn more interest than your checking or savings account offers, business CDs may be worth looking into. They work similarly to personal CDs and may pay a higher interest rate.

Here’s what you need to know about business CDs before putting your money in them.

What Is a Business Certificate of Deposit (CD)?

A certificate of deposit is a special type of account that holds money for a set period. During this period, you generally cannot withdraw funds from the account. You earn a fixed interest rate in exchange for locking your money away for the term. 

These accounts are designed to help your money grow. By locking it away, you cannot withdraw money before the term expires. Some CDs do allow you to withdraw money early, but you typically have to pay an interest penalty to get money out.

Generally, CD rates are higher than savings account or checking account interest rates. Rates vary depending on the institution you get a CD at, the length of the CD, and the amount of money you deposit.

Higher dollar amount CDs and longer CDs generally pay higher interest rates than shorter CDs with lower balances.

Business CDs are usually FDIC-insured as long as an FDIC member institution issues the CD.

Not all CDs work the same, though. Some institutions offer popular varieties of CDs that are more flexible for businesses.

You’ll commonly see CDs that allow early withdrawals if you pay an interest penalty. No-penalty early withdrawals also appear but are less common. 

Some CDs allow you to make additional deposits to a CD throughout the time you own it. Others may allow you to increase your interest rate once during the term of the CD.

Expect lower interest rates on these alternative CD types as they give banks less certainty.

Factors to Consider When Choosing Business CDs

There are four main factors you likely want to consider when choosing a business CD.

CD term

The CD term states how long you have to keep your money in a business CD. Longer terms tend to pay higher interest rates than shorter-term CDs. The downside is your money is locked away for the entire term, even if rates are rising.

Shorter-term CDs allow you to lock in higher rates on future CDs in a rising rate environment. However, you may end up wishing you locked in a longer-term CD once interest rates start falling.

Interest rate

The interest rate is one of the largest factors to look for in a CD. It’s the benefit you get for locking your money away with a bank.

If all other factors are equal, the CD with the highest interest rate is likely the best choice.

Longer-term CDs tend to offer higher interest rates than shorter-term CDs. Similarly, higher dollar amount CDs tend to pay higher interest rates than lower dollar amount CDs.

Early withdrawal penalty

The ability to withdraw money from a CD early is normally a good option to have. While you may not expect to need the money during the term of the CD, things can change quickly.

Penalties for early withdrawals are commonly defined by a certain number of months of interest you forfeit. Longer CDs may have steeper early withdrawal penalties. 

Expect to lose at least three months of interest for withdrawing money early.

Some CDs are called no-penalty CDs and have more flexible terms to allow you to withdraw money early without a penalty. 

When compared to normal CDs, no-penalty CDs often pay lower interest rates. Essentially, you’re paying the penalty by taking a lower interest rate with no-penalty CDs.

Minimum opening deposit

You must have at least the minimum opening deposit to open a particular CD. The higher the minimum is, the higher the interest rate you should be able to expect.

Some banks may offer CDs with tiered interest rates based on the amount you can deposit.

What Happens When a CD Matures

When a CD matures, one of two things normally happens. In some instances, your CD and interest earned will be deposited into a bank account you specify. In other cases, a CD may be automatically renewed by the institution.

Check your CD maturity options before your CD matures to make sure you understand what will happen to your funds.

Pros of Business CDs

Business CDs have a handful of benefits compared to keeping your money in a checking or savings account.

Most of the time, CDs will offer higher interest rates and therefore higher annual percentage yields (APYs). This allows you to earn more interest on the money you have at a bank.

A CD can also keep you from spending money you want to save for a future need. By locking the money in a CD, you can’t withdraw it without paying a penalty. This could be enough of a barrier to help you keep the money.

CDs can be very beneficial if you expect interest rates to decline. You could lock in higher interest rates today for a long period.

Cons of Business CDs

Business CDs aren’t always the right product to save money.

Businesses aren’t always easy to predict. You may need access to your funds before the CD matures. The early withdrawal penalties CDs charge for removing money can be costly.

CDs may end up hurting your interest-earning potential, too. In a rising rate environment, you might not earn as much interest as possible because of fixed rates. 

Your CD could lock in what appears to be a good rate only to have a savings account interest rate quickly surpass your locked-in long-term CD rate.

When Business CDs Might Make Sense for Your Business

Business CDs make sense when you don’t need money for a set period but do need the money at a future date. 

For instance, someone planning to open a new location in two years may want to earn more interest on their money than a savings account offers. A business CD could be a good option for this situation.

As long as the business CD is FDIC insured and under the FDIC insurance limits, you have certainty your money will be available when the CD matures.

If the money isn’t needed in the business at any point in the future, you may be better off investing the money in other ways.

Alternatives to Business CDs

Business CDs won’t always be the best option for your business’s funds. You may want to look into other products and services.

Business savings or interest checking accounts

Often, a business savings account or checking account could provide a decent interest rate while keeping your money accessible.

In particular, you may want to look into online banking business accounts. These banks don’t usually have physical branches. 

These banks often pass along the cost savings of not maintaining brick-and-mortar locations by paying higher interest rates.

Other investments

A bank account isn’t your only option, though. You may want to invest your business’s excess cash in other assets such as treasuries, bonds, or even exchange-traded funds.

Each investment has its own benefits and drawbacks. Make sure you don’t invest your money in an asset with more risk than you’re willing to take on.

Business CDs, savings accounts, and checking accounts are nice because there is no risk of losing money if you stay below FDIC insurance limits. Other investing alternatives could leave you with less money than you put in if the investment declines in value.

How to Open a Business CD

Opening a CD at a bank you haven’t done business with will likely require the same information you need to open a bank account. 

This can include the following documents:

  • Employer identification number (EIN)
  • Business formation documents
  • Licenses to run your business
  • Ownership information and agreements

The above list is normally the minimum required. Each bank may have its own guidelines which may require more information.

If you already have accounts with the bank you plan to open a CD with, you may not have to provide any additional documentation.

You’ll also need the money you wish to put into the CD.

Once you’ve found the bank you want to open a CD with, contact the business banking department to move forward with the process. You may have to make an appointment with a business banker to open an account.

Take Action

If your small business has money to set aside for a future date, a business CD may be the right place to put your money to work. If that’s the case, evaluate your CD options based on your business’s needs.

Once you find the best-fit CD, open the business CD so your business can start earning interest and growing its funds for the future.

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