Should CDs be in the mix of finance tools for a SMB?

In October 11, 2018

Cash flow for a business can be a complicated balance of spending versus saving, but here’s a simple idea from the personal banking side that might be useful: stash extra cash in a certificate of deposit (CD).

This common retirement tool makes sense to consider as a safe harbor for business funds, too. Not only does it protect revenue from market fluctuations and accidental spending, but it earns interest.

The trick is making sure the length of the CD aligns with business cash flow needs. How can that be done? By staggering the maturity dates—called a CD ladder–to ensure cash is available when needed, or, if you have a good sense of timing, purchasing one with a date that matures shortly before you think you’ll need the money.

Hold revenue for inventory purchases

If a business is just coming off its peak revenue season that needs to save money for next year’s seasonal merchandise purchases, investing in a CD that matures shortly before the cash is needed to buy the next season’s inventory can be wise choice.

It’s less accessible until the CD matures, which keeps that money from being siphoned away for other business needs.

4 smart moves to get the best CD investment rates possible

Save for a long-term goal

CDs are also useful to save for a long-term goal or big-ticket items, such as manufacturing equipment, replacing information technology hardware, or a future acquisition, even replacing a fleet of cars.

Since the term can range from seven days to five years, timing can be easily matched to when the cash will be needed.

Secure cash as collateral

It can also be a smart way to demonstrate collateral to a bank, or invest a cash down payment with the lender while working through a longer loan underwriting process, like that of a commercial construction loan or a commercial real estate purchase.

By securing cash with the bank, it bolsters the business’s financial standings while creating a relationship history.

This common mistake can obliterate CD earnings

How CDS work

Opening a new CD typically requires a visit to the bank or online processes to open an account and transfer money, and it pays to research rates before deciding where to deposit your money.

Interest rates vary and often correlate with the maturity date – short-term CDs have lower interest rates than longer ones,

Other factors that influence the rate may include the following:

  • New customer offers versus those offered to existing customers,
  • Regional or community banks versus national banking chains,
  • Timing at a specific bank, since rates vary depending on their need for deposits,
  • Market timing, since rate are influenced by the Federal Reserve and other government measures

When shopping rates, be sure to closely review the full disclosure documentation for penalties, fees and other details that impact your earnings. Also be aware that CDs typically list an annual percentage yield (APY) rather than the simpler annual percentage rate (APR), a calculation that considers compound interest.

CDs are a low maintenance savings tool if it has automatic renewal, meaning the cash rolls forward into a new CD if cash isn’t removed during the grace period.

Depending on the terms of the CD, some allow additional deposits to be made during the term of the CD, which is ideal for a business that plans to contribute to their existing CD portfolio.

For answers to any questions you might have about cash management, business use of CDs or business banking, call or visit your closest branch of Horizon Community Bank today.

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