To help guide your decision, we’ll discuss what business savings accounts are; cover their benefits and limitations; address the timing of when to open a business savings account; and answer some frequently asked questions on the topic.
What Is a Business Savings Account?
A business savings account can often be opened in conjunction with a business checking account. Typically, a business checking account is used for revenue and regular transactions such as paying bills and making purchases, and business savings accounts are reserved for storing funds. Business owners can move money between checking and savings accounts according to their financial demands. Usually, money is kept in the savings account and moved into the checking account as needed. Below, we’ll discuss the advantages and drawbacks of having a savings account for your business.
What Is the Point of a Savings Account?
There are a number of reasons why small business owners might consider opening savings accounts. We’ll discuss a few of the common purposes.
Save for the Unexpected
Savings accounts are great places to store cash to prepare for the unexpected—both good and bad. Having a rainy-day fund for emergencies or unanticipated expenses is important for small businesses, and can bring peace of mind for you as the owner. Cash on hand can also allow you to take advantage of business growth opportunities as they arise without having to jump through all the hoops involved with borrowing money.
Plan for Upcoming Expenses
Putting money into savings on a regular basis can help you to plan for future costs and invest in your business’s growth. Budgeting in advance to prepare for upcoming expenses such as renovations, business taxes, or even retirement can help to alleviate financial stressors.
Earn Interest
You can earn more interest—money that the bank pays you for using your funds—by keeping your cash in a savings account than you would in checking. Some savings accounts, such as a high-yield account, have a higher interest rate or annual percentage yield (APY) than others.
Prevent Overdrafts
Linking a business’s checking account to its savings account can help prevent overdraft fees. If there aren’t enough funds in the checking account to cover expenses, money can be automatically transferred from the savings account. This can help protect against unexpected fines.
Increase Security
Business savings accounts are typically protected by the Federal Deposit Insurance Corporation (FDIC). This means that if a bank is unable to pay you back your money and/or has closed down, the FDIC will ensure that your funds are repaid up to an insurance limit of $250,000.
Limitations of a Savings Account
While savings accounts can come with many benefits for your small business, there are some limitations to consider before opening an account. For instance, savings accounts may require a minimum balance amount to prevent you from being charged a fee. If you aren’t able to meet this minimum threshold, you can end up regularly paying money to maintain an account. There is also an opportunity cost of keeping too much of your funds stashed away. If you keep more money than necessary in your business savings account, you could be missing out on opportunities to grow your business, or investing the funds in places that might bring higher returns.
When You Should Open a Business Savings Account
Savings accounts can be very beneficial for business use. When deciding where to open an account, business owners should be attentive to a bank’s terms and potential fees. However, opening up a savings account probably may not be as much of a priority if your business is still fairly new or isn’t bringing in enough income to meet the minimum account balance requirements.
