7 Ways a Business Savings Account Can Improve Your Cash Flow
Benilyn has over a decade of experience as a banking officer. Her expertise is featured throughout Fit Small Business in personal finance, credit card, and real estate investing content.
This article is part of a larger series on Business Banking.
As a business owner, you will need a separate business savings account, especially if you want to set aside extra funds for emergencies and future growth. A business savings account can provide you with the opportunity to earn interest and help build your finances. Without it, you’ll risk mismanaging your business resources.
Do I Need a Business Savings Account?
If you want a safe place to store your business’ money for future use or to build an emergency fund, opening a business savings account is highly recommended. Business savings accounts are federally insured, accessible, and allow you to save your profits while earning interest. The many benefits of having a business savings account make it a resource any business owner should have.
7 Business Savings Accounts Benefits
A business savings account can help improve your business in many ways. To enjoy the benefits of a business savings account, it’s important that you deposit funds consistently to help grow your finances. There are many reasons to open a savings account for your business, including earning interest on your deposits, improving creditworthiness, and having a safe place to save funds for taxes.
Below are the seven important benefits of having a business savings account.
1. You Can Prepare for Emergencies
Unexpected expenses are inevitable. Business owners should always prepare for emergencies, and one of the best ways to do this is to have an emergency fund. Having a business savings account gives you an extra cushion in case of costly unanticipated events, providing a way to pay for unexpected expenses without having to take out a loan. The less you need to finance, the better as financing often comes with extra cost. Since business savings accounts are liquid assets, you can access your funds when you need them easily without cost.
2. You Can Save for Tax Payments
A business savings account allows you to set aside money to pay for future taxes. If you only use your business checking account, you may not have enough funds available when tax season comes since checking accounts are typically used for general business expenses. Having a cash reserve designated for tax payments in a separate business savings account helps ensure that you have sufficient money to pay the IRS.
3. You Can Save for Future Business Growth
Saving money in a separate business savings account allows you to prepare for future business projects and growth. When it comes to business, owners should think long-term. It will be easier to fund a business expansion if you have extra funds reserved for that particular purpose. Funding growth without having to take out huge loans will help you save on interest costs and maximize your profits.
4. You Can Earn Interest on Your Deposits
With a business savings account, you can grow your money by earning a competitive annual percentage yield (APY) on your deposits. There are banks offering high-yield business savings accounts that provide better interest rates compared to the national average. If you can maintain a higher minimum balance on your account, there’s a good chance that you’ll get a higher interest rate too.
5. You Can Protect Your Money With FDIC Insurance
One of the best things about a business savings account is that you have up to $250,000 of Federal Deposit Insurance Corporation (FDIC) protection. A business savings account is more secure than other interest-bearing options like investment accounts, which are not covered by FDIC insurance. With a business savings account, you don’t have to worry about losing all your money if the bank fails.
6. You Can Use It for Overdraft Protection
Another benefit of having a separate business savings account is that you can set it up for overdraft protection if you maintain your business checking account in the same bank. Using your savings account as overdraft protection means that your savings funds will be transferred automatically to your business checking account to cover your transactions if you overdraw the account, preventing costly fees.
7. It Helps Make Your Business More Creditworthy
A business savings account can help improve your banking relationship and financial history. In general, it can help make your business more creditworthy, especially in the eyes of lenders. Lenders will often want to see your bank statements when you apply for business loans or lines of credit. Having funds in your savings account shows that you have funds available and are capable of repaying the loan.
Building your business savings account generally puts your company at an advantage. If you find these benefits appealing and you decide to open a business savings account, make sure to find one that offers the best APY at the lowest cost. To help, we’ve compiled a list of the best savings accounts for your business based on several factors, including APY, fees, balance requirements, and other account features.
Risks of Not Opening a Business Savings Account
- Commingling business and personal finances: A business savings account stores your company savings safely in a designated business bank account so that you don’t have to use your personal savings account to save extra business funds.
- Being unprepared for emergencies: Without an emergency fund, your business will be vulnerable and less prepared for unforeseen events, which often come with unanticipated business expenses.
- More financing costs: You may be forced to finance expenses, especially unexpected ones, if you don’t have a business savings account as a backup.
- Denial of business loans and credit: Some business lenders require bank statements and proof of business savings for approval. Without a business savings account, you’ll find it more difficult to be deemed creditworthy.
- Missed opportunity to grow your extra business money: Savings accounts allow you to earn interest on your deposits. If you keep your business funds in a noninterest-bearing checking account, you’ll miss out on the opportunity to grow your money passively.
Bottom Line
A business savings account is an essential tool for helping your business save extra funds for future use. It works as a backup to sustain your business during lean times and help pay for unplanned expenses. A business savings account protects your profits while it earns interest. It’s best to open one at the same time you open your business checking account so that you can start saving money immediately.
