A business certificate of deposit (CD) is a time-deposit savings account that offers fixed interest for a set period. This low-risk option helps businesses earn competitive interest and protect their funds since most CDs are insured by the Federal Deposit Insured Corp (FDIC)
If you would like to open a business CD, U.S. Bank is a great option. It offers business CDs that earn an annual percentage yield (APY) from 0.5% to 4.75%, depending on the type of CD (e.g., traditional, variable-rate, no-penalty, jumbo, or IRA
- How Does a Business Certificate of Deposit Work?
- Common Types of Certificates of Deposit
- Pros & Cons of a Business Certificate of Deposit
- Pros of Having a Business CD
- When to Consider a Business Certificate of Deposit
- Factors to Consider When Choosing a Business CD
- Where to Apply for a Business Certificate of Deposit
- Business Certificate of Deposit Alternatives
- Frequently Asked Questions (FAQs)
- Bottom Line
How Does a Business Certificate of Deposit Work?
After opening a business CD, which is similar to how you open a bank account, you can no longer access those funds until the term period ends or reaches the maturity date. Once the CD matures, you can choose to withdraw the total funds or roll it over into another CD.
Business CD terms can be as short as one month or as long as 10 years. If you don’t withdraw the funds after maturity, the bank will automatically renew your CD for the same term. Business owners who withdraw their CD funds before the maturity date can risk paying an early withdrawal penalty.
How CD Rates are Determined: The Federal Reserve
The Federal Reserve determines the national prime rate, which impacts the rates banks set on savings accounts and CDs. When the Federal Reserve cuts its benchmark rate, CD issuers may drop the APY they offer on interest-bearing accounts.
Common Types of Certificates of Deposit
Traditional CDs are a safe way to earn higher interest while having a guaranteed long-term interest rate. There are different kinds of CD accounts with a variety of term lengths, interest rates, and requirements after maturity.
| CD Types | Benefits | Drawbacks | Best For |
|---|---|---|---|
| Traditional |
|
| New savers looking to earn good rates with standard terms |
| Variable-rate |
| — | Earning a higher APY if interest rates increase during a CD term |
| No-penalty |
|
| Accessing CD funds before the end of the term period |
| Jumbo |
|
| Large corporations and pension funds |
| IRA |
|
| Acquiring retirement funds with consistent returns |
Pros & Cons of a Business Certificate of Deposit
| PROS | CONS |
|---|---|
| Pays higher interest rates than other traditional savings products | Offers less flexibility |
| Is a low-risk investment | May come with penalty fees |
| Is FDIC-insured | Offers lower interest for some CD types |
Pros of Having a Business CD
- Pays higher interest rates than other savings accounts: Business owners who already have a deposit relationship with a bank can earn even higher interest rates on their CDs. Most business CDs offer fixed rates that guarantee that rate until the term ends. CDs typically offer higher interest rates than traditional savings accounts, with some CDs offering up to 1% to 2% more in APY.
- Is a low-risk investment: CDs are low-risk because the APY is locked in for an entire term period. You don’t risk losing your principal deposit unlike with investment accounts.
- Is FDIC-insured: Your deposit is protected for up to $250,000 in case the bank goes out of business or fails. Most credit union CDs are insured up to $250,000 with the NCUA.
Cons of Having a Business CD
- Offers less flexibility: Business CDs come in time-locked terms, and you may not have access to the funds until it matures. Term lengths can be as long as 10 years.
- May come with penalty fees: Most business CDs charge early withdrawal fees when you withdraw money before the maturity date. Penalty fees for early withdrawals can be steep, which can affect your principal amount.
- Offers lower interest (for some CD types): Some CDs, like the no-penalty CD, allow account holders access to funds before the maturity date without any fees. However, those CDs offer lower interest rates than standard CDs.
When to Consider a Business Certificate of Deposit
- You seek to earn more interest: CDs are one of the top ways to earn interest since APYs are typically higher than traditional savings and most money market accounts (MMAs). Generally, the longer the CD term, the higher the APY.
- You want to secure funds you won’t need in the short term: Businesses that won’t use their funds right away can get a business CD with a term as long as 10 years. Meeting savings goals is easier when the funds cannot be withdrawn easily.
- You need a low-risk investment: CD accounts are considered a safe and low-risk investment option because they are usually FDIC- or NCUA-insured in case the issuer fails or goes out of business.
- You want to lock in a higher interest rate: Fixed-rate business CDs are an opportunity to lock in high interest for the entire term of the CD, without the worry of falling interest rates.
Factors to Consider When Choosing a Business CD
Before choosing a business CD, you need to consider the terms, rates, and fees.
Business Certificate of Deposit Terms
Maturity dates for business CDs typically vary, and term lengths can range from one month to 10 years, with the most common terms being six, 12, 18, 24, 36, 48, and 60 months. In most cases, you’ll need an existing relationship with a bank to open a business CD account, but not all CD issuers require this.
Business Certificate of Deposit Rates
Business CD rate movements are dynamic and tend to move in the same direction as the national prime rate. Below is a sample business CD rate table that lists CDs with six- to seven-month terms from different financial institutions.
| Sample Business Certificate of Deposit Rates | |||||
|---|---|---|---|---|---|
| CD Type | CD Term | Minimum Deposit | APY | For More Information | |
| U.S. Bank | Special CD | 7 months | $1,000 | 4.75% | Visit U.S. Bank |
| Bank of America | Business Featured CD | 7 months | $1,000 | 4.75% | Visit Bank of America |
| Live Oak Bank | Business CD | 6 months | $2,500 | 3.70% | Visit Live Oak Bank |
| TAB Bank | Business CD | 6 months | $1,000 | 5.27% | Visit TAB Bank |
| Affinity Plus FCU | Basic Business Certificate | 6 months | $500 | 4.75% | Visit Affinity Plus FCU |
Business Certificate of Deposit Fees
Closing or withdrawing funds from a business CD account before the maturity date will typically incur penalty fees. These fees are based on the term length of the CD and are often applied in the form of interest earned up through the date of withdrawal or maturity.
Common early withdrawal fees are:
- Three-month term or less: 30 days of interest, all interest earned, or even days of interest, whichever is greater
- Three- to 12-month term: Three months of interest
- 12- to 24-month term: Three to six months of interest
- 24- to 60-month term: Three months to one year’s interest
- Over 60-month term: Three months to one year’s interest
Where to Apply for a Business Certificate of Deposit
The most common place to get a business CD is from a bank or credit union. Brokerage firms also offer CD accounts that are FDIC-insured, which is a plus for conservative investors. You can apply for a CD account in person or online.
- Banks: Banks are the most common place to open business CDs. If you already have an existing relationship with the bank, you can easily open a CD by transferring funds from your current bank account. Bank CDs offer FDIC-insured accounts that guarantee you will get your money back in case of bank failure. However, those looking for the best rates should shop around online to compare prices.
- Credit unions: Business CD accounts are readily available at credit unions and typically offer higher interest rates on business CDs than banks. Credit union CDs are also insured up to $250,000 by the NCUA. However, credit unions typically have specific membership requirements to join, like residency in a specific community or working for a sponsored company.
- Brokerage firms: Brokered CDs are obtained through a brokerage firm, are typically FDIC-insured, and have multiple banks that compete for accounts, so the rates are competitive. However, you may have to pay additional brokerage fees. And since brokerage firms can purchase CDs from multiple banks, you can potentially have FDIC coverage for more than the standard per-bank limit.
Business Certificate of Deposit Alternatives
A business CD isn’t the only option for earning competitive interest. You can open a high-yield savings account, money market account, interest-earning checking account, or invest in treasury bonds.
- High-yield savings accounts offer more interest than traditional savings accounts and allow easier access to funds than traditional business CDs. All of the banks in our guide to the leading business savings accounts have high-yield offerings.
- Money market accounts (MMAs) give higher interest than traditional savings accounts and provide check-writing privileges. However, some banks may limit the number of monthly transactions for MMAs, but in terms of access to funds, they offer more flexibility than most CDs.
- Interest-earning business checking accounts provide unlimited access to your funds. Some online providers offer higher APY for this product than traditional banks. See our guide to the best small business checking accounts for suitable options.
- Treasury bonds are long-term investments offered by the US government and have fixed interest. They are more liquid than business CDs and are considered safe as they’re government-backed even if they’re not banking products.
Related resources:
Frequently Asked Questions (FAQs)
What is a business CD, and how does it work?
A business CD is an account that allows you to earn interest and access your funds after a specified period. It earns a set interest rate, and deposited funds are available after the maturity date. CD term lengths can run from one month to 10 years.
Is it safe to open a business CD?
Yes. Among the different types of banking products available, business CDs are often considered secure investments with a guaranteed interest rate and a standard FDIC coverage.
What happens if I withdraw my business CD early?
Withdrawing business CDs early can subject you to penalties that can lower your interest earnings or a portion of the principal amount.
How do personal CDs differ from business CDs?
There is little difference between personal CDs and business CDs, except that business CDs are exclusive to business owners. The opening balance required for business CDs may be higher in some banks, but the rates offered may also be higher.
Can you lose your money on a CD?
No, you will not lose your principal amount or the interest you earned up to $250,000 when you place funds in an FDIC- or NCUA-insured CD. However, if you remove the funds before the end of the term or maturity date, you will incur penalty fees equal to or more than a portion of the interest you’ve earned, which can reduce your principal amount.
Do you have to pay taxes on a CD when it matures?
Funds that you deposit into a CD are, in most cases, not taxable. However, the interest you earn on the CD during the term is considered taxable income. In some cases, like with IRA CDs, the interest you earn may not be taxable. Check with your CD issuer to confirm your account’s policies.
Bottom Line
A business certificate of deposit account is an excellent way to earn more interest on your company’s savings rather than placing your funds in other savings products. With multiple CD rates and common terms at six, 12, 24, 36, and 60 months, you have plenty of options to help support your financial goals through higher APY earnings.
