7 Ways a Business Savings Account Can Improve Your Cash Flow
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
Ricci Recto has two years of writing experience creating digital marketing content for finance clients. She specializes in business banking.
This article is part of a larger series on Business Banking.
Creating a dedicated business saving account is a great way to start building funds for emergencies or other business goals. Business savings accounts are Federal Deposit Insurance Corporation (FDIC)-insured to keep your money safe and offer higher interest rates to help grow your balances. Without a savings account to separate your savings from your working capital, you’ll risk mismanaging your business resources.
We look at seven business savings account benefits below.
1. You Can Prepare for Emergencies
Your business savings account is the best place to store funds for unexpected expenses. If you make it a habit to deposit excess funds into your business savings account, you can build an extra cushion in case of costly unanticipated events without having to take out a loan. 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 gives you a place to set aside money for future taxes. Because business checking accounts are typically used for current business expenses, you may end up prioritizing current expenses over future tax payments if you use a business checking account without a separate savings account. Having a cash reserve designated for tax payments in a separate business savings account helps ensure you have sufficient money to pay the IRS when tax season comes.
3. You Can Save for Future Business Growth
When it comes to business, owners should think long-term. Saving money in a separate business savings account allows you to prepare for future business projects and growth. It’ll be easier to fund a business expansion if you’ve built the habit of setting aside money for your goals. 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
Savings accounts tend to offer higher interest rates than checking accounts. If you choose accounts with competitive annual percentage yield (APY), the money you place inside your business savings account will generate profit instead of sitting idle. Many banks also reward larger savings balances with higher interest rates, allowing you to earn more by saving more.
5. You Can Protect Your Money With FDIC Insurance
Business savings accounts are typically protected under the FDIC for up to $250,000, which guarantees that you will get your funds back in case your bank fails. FDIC insurance makes savings accounts safer than other interest-bearing options, such as investment accounts.
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.
Risks of Not Opening a Business Savings Account
- Commingling business and personal finances: A business savings account safely stores your company savings 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.
- Incurring 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.
- Being denied business loans and credit: When applying for lending services, having bank statements from business savings accounts gives your lenders more confidence that you can pay off your debts. You’ll find it more difficult to be deemed creditworthy without a business savings account.
- Missing the 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 non-interest-bearing checking account, you’ll miss out on the opportunity to grow your money passively.
Best Business Savings Accounts
Building your business savings account generally gives your company an advantage. If you find these benefits appealing and decide to open a business savings account, find one that offers the best APY at the lowest cost. Our guide to the best savings accounts for your business lists excellent products based on several factors, including APY, fees, balance requirements, and other account features. Here are a few you can consider:
- Live Oak Bank is the best overall savings account with the highest APY. Its savings account earns interest at a rate of 2.75%, which is 13 times larger than the national average.
- Prime Alliance Bank is best for tiered APY. Its business savings account earns tiered interest, letting you earn larger profits on bigger balances.
- First Internet Bank is one of the best business savings with a full-service digital bank and is one of our picks for the best checking accounts for small businesses. On top of high-yield savings, it offers a full range of online business services, such as certificates of deposit (CDs), money market accounts, lines of credit, term loans, and SBA loans.
Bottom Line
Business savings accounts earn interest and protect profits, helping your business save extra funds for future use. By opening a business savings account and building the habit of making consistent deposits, you can create a backup to sustain your business during lean times and help pay for unplanned expenses. It’s best to open a business savings account at the same time you open your business checking account so that you can start saving money immediately.
