What are the pros and cons of a business savings account?

Running a business can be unpredictable, particularly during a rocky economy. One of the best ways to help navigate economic ups and downs more effectively is by maintaining a business savings account.

A business savings account provides a dedicated, secure place to set aside funds that are not needed for day-to-day operations, allowing the money to earn interest while also remaining easily accessible should an unexpected expense arise.

While establishing a business savings account is an important part of managing your business funds effectively, there may also be fees and minimum balance requirements associated with this type of account. Your access to funds in the account may also be limited. For these reasons, it’s important to have a clear understanding of your businesses’ financial needs and cash flow along with the pros and cons of a business bank account.

How a business account is different from a personal savings account

Personal savings accounts are designed for individual use as a place to set aside money that may be needed for long-term goals or to help cover curveballs or unexpected expenses. Personal savings accounts are also a good place to deposit several months of living expenses that can be tapped in case of an emergency.

By contrast, a business savings account is typically maintained by a company and is used to help manage business cash flow. In addition, a business savings account typically offers more structure and protection than a personal savings account.

“A business savings account is often utilized to house funds intended for future business expenses or as an emergency fund for a business,” says financial advisor Steve Sexton, CEO of Sexton Advisory Group. “These funds are usually kept separate from funds used for a business’s daily operating expenses, which are often stored in a business checking account.”

Common features of business savings account

Business savings accounts typically have several common features including:

• Interest paid on deposits: Interest may be tiered offering higher returns for higher business savings balances.
• Limited monthly transactions: Depending on the terms of the account, there may be a maximum number of withdrawals or transfers that are allowed each month. “Some financial institutions have a limit on the number of monthly withdrawals made from a business savings account. However, funds can be deposited to the account at any time,” says Leah Evans, director of product management for Georgia’s Own Credit Union.
• Minimum balance requirements: It’s not unusual for business savings accounts to require a minimum balance be maintained in order to avoid service charges. A minimum balance may also be required in order to earn the account’s most competitive interest rate offers.
• Online and mobile banking capabilities: Most business accounts allow account holders to access, manage and move funds via the internet or using a phone or tablet.
• Insured by the Federal Deposit Insurance Corporation (FDIC): Deposits in a business savings account are typically insured up to $250,000 per business entity, per insured bank.

Pros of a business savings account

There are several benefits that come with establishing a business savings account, particularly when the account is managed effectively.

Earns interest

Business savings accounts are known for offering interest. To make the most of this benefit, shop around before deciding where to open this type of account. Compare traditional banks, credit unions and online banks to identify the most competitive interest rate offers. Finding the most valuable interest rate offer can help your money grow even more aggressively.

“Business savings accounts typically offer higher interest rates than a standard checking account, which allow your funds to grow faster, and can also help improve your financial profile in the event you’re applying for a business loan,” says Sexton.

Separates savings from operating funds

Maintaining a separate business savings account can help streamline your operations and achieve financial goals. When funds are separated properly, it’s much easier to be deliberate about making sure money is being used properly in your business.

“Having these funds separated from funds intended for day-to-day operations can help you plan for future business expenses such as upcoming tax payments, hiring new staff or investing in equipment,” says Sexton.

Funds are easily accessible

While there may be a limited number of transactions allowed per month, the money in a business savings account is still easily accessible compared to a CD or an investment account.

“Business savings accounts are liquid and can be accessed at any time,” says Evans.

Cons of a business savings account

All financial vehicles have some drawbacks to consider. Before opening a business savings account make sure you read the fine print of the account agreement to make sur the account is right for you.

Limited monthly transactions

Some financial institutions limit the number of monthly withdrawals for a business savings account. Often, the limit is about six withdrawals per month.

“This could cause accessibility issues for the business if they were to exceed the maximum number of withdrawals,” says Evans. “An over-the-limit fee is typically assessed with the first occurrence, followed by additional actions like suspension of withdrawals.”

Fees

In addition to incurring fees for making excessive withdrawals, some business savings accounts may also charge other fees including maintenance fees or a fee when the required minimum balance is not maintained.

“Business savings accounts typically come with higher fees and higher minimum balance requirements than personal checking accounts,” says Sexton. “It’s important to know what these are ahead of opening a business savings account.”

Minimum balance requirements

Some business bank accounts require that a certain balance be maintained in order to avoid fees or to earn the most competitive interest rates available. Depending on your business’s cash flow and financial needs, this may not be ideal.

How to decide when to get a savings account for your business

A business bank account can be a good idea for all types of businesses including freelancers, sole proprietors, LLCs and corporations and businesses whose income tends to fluctuate. Establishing this type of account can allow for being more deliberate and organized with your business funds.

But deciding whether a business savings account makes sense comes down to your business’s cash flow and financial needs. You’ll want to compare these considerations against the rules and restrictions of the savings account to ensure they will work for your business operations.

“Before committing to a business savings account, make sure you’re aware of minimum balance requirements, fees, interest rates, withdrawal limits and related fees,” says Sexton.

Each of these factors should play an important role in deciding whether a business savings account will support your goals.

Bottom line

Business savings accounts are an effective tool for separating business funds for long-term goals from daily operating costs. In order to make the most of this type of account, however, it’s important to shop around and find account terms and rates that work best for your business and its cash flow. Some may have minimum balance requirements or transaction limits that may not be suitable for your business. And remember, when researching business savings accounts, comparing traditional banks, credit unions and online banks can help you find the competitive terms available.