You should feel great if you’ve gotten your business to a point where you have enough income to start squirreling some away. So, next, you need to know where to put it—which means understanding questions like the difference between savings accounts vs. CDs.
That’s a good thing to know if you’re hoping to make your money grow. After all, both savings accounts and CDs are both for earning interest on your money, as opposed to dealing with day-to-day expenses through a business checking account.
But the difference between savings accounts vs. CDs are pretty substantial. And that’s because the way that they each help you grow your money are pretty divergent. Choose the wrong one, and all of your valuable interest could go down the drain.
So, what’s the difference between savings accounts vs. CDs? Thankfully, it’s pretty easy to distinguish them—and then choose the right one for your small business needs.
The difference between business savings accounts vs. CDs comes down to interest rates and your ability to withdraw funds. Savings accounts provide less interest than CDs, but your money stays liquid. In other words, you’re allowed to withdraw money at any time. Unlikely savings accounts, CDs have higher interest rates, but don’t have the same liquidity. You’ll be penalized for withdrawing funds before the end of their maturation date.
There are, of course, more nuances than that and a few things to define before you make your choice. That’s the top-level difference between savings accounts vs. CDs, however, that you should understand before we get any more detailed.
Business savings accounts are great for entrepreneurs who have enough operating cash to put some of it in reserves. They’re not meant for a high number of transactions per month like business checking accounts—aka you won’t be writing checks from them, hence the name. And business checking accounts rarely offer interest on your deposits, whereas business savings accounts will come with a higher APY (annual percentage yield). That means you’ll be able to earn more interest on the money you keep within the account.
Plus, with interest rates on the rise, there hasn’t been a better time to open a business savings account in a long while—you’ll earn more interest, and put idle money to work for you.
CD is short for “certificate of deposit.” CDs provide another way for small business owners to gain interest on hard-earned savings. In fact, small business CD interest rates tend to be higher than business savings accounts—sometimes even a point greater than their savings counterparts.
CDs offer a consistent interest rate throughout the course of a certain number of months or years. Most CDs can provide better interest rates because there’s a set amount of time you need to keep your money in the account. Small business CDs generally range from shorter-term conditions (such as three months), all the way up to five years.
One important thing to remember, though, is that interest rates often fluctuate. Today’s 2% rate may seem great compared to what it was last year, but if interest rates double or triple during the course of your CD, you’re not going to be able to take advantage of the increase. But, on the other hand, if interest rates drop, your money’s safely stashed away earning more than it would in a savings account.
That all comes down to interest rates. Here’s a very elementary example:
Let’s say you get a 0.5% APY on a certain business bank account, while a high-yield 2-year CD could offer 1.75%. If you were to put $1,000 into both of those accounts and return two years later, not adjusted for taxes and inflation, you’d have:
Obviously, that’s a higher yield—but remember that you can’t touch a penny of that $1,000 deposit without penalty during that two-year period. That’s the tradeoff for the higher-interest reward.
Back to that thing about interest rates, though. This example assumes that that the APY on your savings account doesn’t change over two years. And there’s also a possibility, like we mentioned above, that when you lock into a CD, you might miss out on a higher rate down the line. That means there could be an opportunity for a CD with an interest rate that’s way higher than the APY on your business savings account.
So, although this is one scenario, the difference between savings accounts vs. CDs in terms of returns is totally situational—and totally dependent on the interest rate. Sometimes they’re great, and sometimes they’re negligible.
If you’re feeling good about understanding the difference between savings accounts vs. CDs, now you’ll need to know how to choose the right savings vehicle to serve your small business banking needs best.
Does the idea of locking up a lump sum of cash and throwing away the key for a period of time make you nervous? If you said yes, or if you flat-out need access to cash, then the savings accounts vs. CDs decision is an easy one for you.
Savings accounts don’t offer quite as much interest as CDs. But this is a small sacrifice if you need to build a safety net for your business that you can feel good about going back to just in case, or merely want to withdraw money from the account when you need to.
Business savings accounts allow you to:
Like we noted, drawbacks include a lower yield, but also be aware that if interest rates drop, your cash won’t be protected from falling rates. Nothing will happen to the money you already have, but your returns will be subject to the fluctuating interest rate—whether that goes up or down.
Many small business owners follow this progression when opening business bank accounts: checking, savings, then high-yield. If you have a business savings account already, then it makes sense for you to get a CD next. (Side note: In order to get small business financing, you almost universally need some kind of small business bank account.)
Also, if you have more than $250,000 in funds (whether it be in a checking account, savings account, or both), you’ll want to move your excess money into something like a CD. That’s because the Federal Deposit Insurance Corporation (FDIC) will only reimburse you $250,000 in the event that your bank goes under.
CDs are also tempting because of the higher interest rates they offer. Most are currently a point higher than savings accounts, offering somewhere around 2%, give or take. But CDs make up for these higher rates by preventing customers from withdrawing funds before the end of the CDs maturation date. If you lock in a five-year CD, you can’t touch your money for the next half-decade. (We might have mentioned that before. But it’s important!)
Here’s what you’d want to use a business CD for:
If you don’t have a business savings account, however, it could be risky to put all of your savings in an account where you don’t really have the flexibility to easily access it… just in case. You might want to think about splitting your cash between a business savings account and a CD, or starting with a business savings account first.
The first thing you want to do when finding a CD for your business is check out current rates. Then, make sure you shop around. You’re sure to find small differences between what each bank offers: sometimes it’s an interest rate that’s a fraction of a percentage point lower or higher than the next.
In other cases, some CDs even give you a one-time chance to change your interest rate. Others will require you to deposit a certain amount of money to open an account. Check these factors against your needs before getting your CD together.
If you’re looking for a high return on your business CD, your best bet for the highest interest rate is opening one with a high-term, aka more years than fewer. But be careful: Interest rates appear to be on the rise as the Federal Reserve (otherwise known as The Fed) increases interest rates.
You might be earning the highest amount of interest by going long right now, but could lose out on better interest rates during the five years that your money’s locked up in a CD. Otherwise, your best bet is to split the difference: Go with a CD that matures within 2-4 years, as you’ll sacrifice some interest rate gains in the name of accessing your money faster.
If you’re really looking to avail yourself to changing interest rates, consider starting a “CD ladder,” which is a series of several CDs with different maturity terms. A mix of short- and long-term CDs will lock in current rates, while also providing you with the chance to reinvest your cash from accounts with terms that expire sooner.
Finding a good CD for your business is mostly about getting the best interest rate for your buck, and picking a bank that makes it easier for you to manage your money. Since most CDs are the same once you’ve put your money away, the real work happens at the beginning of the process. Some high-interest CDs might require you to put a minimum deposit into the account in order to qualify. Check to see how much money you’re willing to set aside, and how much interest you’re happy to get in return.
But don’t forget your own needs, too. If you don’t mind working with a smaller, regional bank, you might get a better interest rate than those offered by bigger banks. But keep in mind that you might not have the same bells and whistles at a small bank as you would with a Wall Street firm—electronic banking, apps, 24/7 telephone support, etc.
Unlike finding a good CD, finding the best business savings account can be somewhat tricky. You’re going to want certain functions that cater to your specific needs: maybe you’re okay with getting better interest rates if you can commit to certain obligations. Or, maybe you’re fine giving up a bit of interest in favor of opening a no-nonsense account instead.
For example, some savings accounts offer a high introductory savings rate that lowers after a set number of months or years. (Kind of like a 0% intro APR business credit card.) Others might give you fewer opportunities to earn higher interest rates, but won’t require you to open an account with a certain amount of money. Others might limit the number of withdrawals you can make in a month, which could come with the tradeoff of other features instead. Many come with monthly maintenance fees, too, which you might want to avoid—and certainly can.
What you’re ideally looking for in a business savings account is a mix of good features, strong interest rates, an adequate number of monthly withdrawals, and a competitive maintenance fee. Strike the right balance for your company, and you’ll be sitting pretty.
The Capital One Business Advantage Savings Account is one example of great features, low fees, and low minimum deposits. You can open a Capital One Business Advantage Savings Account with as little as $250, and if you maintain a minimum balance of $300, Capital One waives their $3 monthly service charge.
Best of all, you’ll get a promotional APY of 2.00% for the first year after the account’s open, making this one of the best high yield business savings accounts out there. That intro APY is competitive with some of the better CDs offered right now.
Do you want to earn as much interest as possible (and are okay with possibly earning less than the going rate in the future? Or would you rather have more access to your money without it being tied up for months or years?
Finding the right product for you is all about compromise, so pick the product that offers you:
Knowing all the differences between savings accounts vs. CDs, you’ll be able to easily pick the right product for your small business.
Brian O’Connor is a contributing writer for Fundera.
Brian writes about finance, business strategy, and digital marketing. He is the former director of digital strategy at Morgan Stanley, and has worked at Foreign Affairs magazine, Student Loan Hero, and as a partner of a small consulting firm, too. Combined, these experiences allow him to offer a unique perspective on the challenges small business owners face.