A business certificate of deposit (CD) account is a low-risk way for small businesses to earn interest on funds they don’t need right away. A business CD account offers predictable returns for business owners, strengthening cash management and long-term planning.
Let’s explore what business CDs are, how they work and their key advantages.
What is a business CD account?
A business CD account allows a business to earn a fixed interest rate by keeping a certain amount of money deposited for a set term. A business deposits funds it doesn’t need access to immediately and earns a fixed interest rate over a set period. This type of business bank account is FDIC insured (up to the applicable limits) and generally offers higher interest rates than standard business savings accounts.
How a business CD account works
With a CD account, a business will deposit a set amount of money for a fixed period — typically, from 3 months to 1 year or more. You cannot make any other deposits after the first deposit until the CD reaches maturity (the term ends).
The bank then pays interest earnings monthly or at maturity, depending on the CD. The annual percentage yield (APY) is predetermined when you open the account, meaning you’ll receive a predictable return, generally via electronic payments or checks.
The deposited funds will remain locked until maturity. Early withdrawals may incur penalties. In exchange for keeping your money in the account for a set period, CDs may allow you to earn higher interest than you would if you kept the funds in a traditional business savings account.
Key benefits of a business CD account
Let’s take a look at the key advantages of business CD accounts for small businesses.
Guaranteed returns for the length of the CD term
One of the best things about CD accounts is that you earn a fixed rate of interest over the term after you’ve opened the CD, helping you grow your business’s savings. In most cases, your CD account’s APY will remain the same for the full length of the term.
Low risk
Money deposited into a CD at an FDIC-insured bank may qualify for FDIC deposit insurance coverage. FDIC insurance is capped at $250,000 per depositor for each account ownership category at a covered bank.
Higher yields
CD accounts typically earn more interest than standard savings accounts. Higher yields make opening a CD account a smart option for small businesses.
Improved financial planning
With a CD’s fixed terms and rates, businesses can forecast earnings to support their financial planning. Business owners can predict what interest they’ll earn and when it will be paid out.
No market fluctuation risk
Unlike investing in stocks or bonds, with a CD, there is no market fluctuation risk. Your principal is protected, and the APY is fixed for the entire term. This is particularly appealing to risk-averse businesses seeking stable growth.
Supports long-term goals
CDs are great for helping businesses set aside funds for taxes, future investments or planned expenses. The funds earn interest while sitting in the account, which helps build the savings.
How CDs support better cash management
Small businesses can use CDs strategically to manage liquidity. They can keep the funds they need accessible for operations in business checking and savings accounts while placing surplus cash in CDs to earn higher interest.
Businesses can manage their cash effectively by using a mix of business bank accounts, such as checking, savings and CDs.
Additionally, they can use what is called “CD laddering” to balance flexibility with higher returns. CD laddering is when a business opens multiple CD accounts with staggered maturity dates, allowing them more flexible access to some of their funds. This savings strategy enables businesses to earn higher interest and maintain periodic access to their money.
What to consider before opening a business CD account
CDs are an excellent way for businesses to manage surplus cash while earning interest, but it’s important to consider a few things when choosing to open an account:
- Minimum deposit amounts: Check the CD’s specific minimum deposit amount to ensure it aligns with your savings goals.
- Early withdrawal penalties: Most CD accounts have early withdrawal penalties. Being aware of the withdrawal penalties can help you make the right choice for your cash flow needs.
- Term length and maturity options: CDs come in various term lengths, typically up to 5 years. Choose the term length that aligns best with your timeline for accessing funds.
- Fixed vs. variable interest rates: Select CDs offer variable interest rates over a fixed term. Decide whether you want a fixed or variable-rate CD by assessing your savings goals and timeline.
How to open a business CD account
Follow these simple steps to open a business CD account.
- Identify extra funds your business can set aside.
If your business has surplus cash, identify what amount can be deposited into a CD to earn interest. Be sure to assess the minimum deposit amount for the specific CD. Setting aside funds for a predetermined time with a CD allows you to earn higher interest than keeping it in a traditional savings account. - Compare CD rates and terms across banks.
When opening a CD account, compare the rates and terms at different banks to find the best option for your needs. Some banks may offer shorter term lengths than others, giving you the flexibility to access funds sooner. Compare APYs across banks to maximize your interest. Remember that CDs with longer terms may offer higher APYs. - Choose a term length that fits your financial plan.
Identify what term length fits your cash management needs, whether it’s 3 months, 1 year or longer. Most banks offer several term lengths to choose from to access funds at maturity. - Open and fund the account with your business banking provider.
Open the account with your preferred banking provider. Make your deposit and watch your funds grow.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.