What a CD Ladder Is & How It Can Benefit Your Business
This article is part of a larger series on Business Banking.
A business certificate of deposit (CD) ladder is a financial strategy where you invest in multiple CDs of varying lengths and staggered maturity dates. By using a business CD ladder, you can ensure that you earn the maximum interest return on your business reserve funds while also making some of those funds regularly available to cover company expenses.
First Internet Bank is an excellent option for building a business CD ladder. It offers eight different business CDs ranging from three months to 60 months in length. Interest rates run from 2.02% to 4.59% annual percentage yield (APY). Visit First Internet Bank for more information.
How a Business CD Ladder Works
A business CD ladder allows you to invest a portion of your company’s financial reserves in multiple timed accounts. CDs require you to keep the invested funds in the account until it matures—and if you withdraw the funds before maturity, you’ll probably have to pay a sizable penalty.
While you can choose to invest all of your reserves in one timed account, it can make those funds inaccessible in case of an unexpected business expense without taking an early withdrawal penalty.
Instead, a business CD ladder allows you to split those funds among multiple CDs with staggered maturity dates. By staggering the maturity dates, you’ll have access to a portion of your reserve funds more regularly, allowing you to spend on business expenses or reinvest in a new CD.
Pros & Cons of a Business CD Ladder
| PROS | CONS |
|---|---|
| Business CDs offer a guaranteed interest rate, which means your rates are locked in until your term ends, despite the fluctuation. | Interest rates can fluctuate—and when the rates decline, you might be reinvesting the ladder into lower rates when a business CD matures. |
| A business CD ladder offers more liquidity because you maintain regular maturity intervals. | Rates may not keep up with inflation, especially with long-term business CDs. |
| You can earn higher interest rates when you have cycled through all your business CDs. | You still need to wait until a business CD matures before you can withdraw your funds. Early withdrawal or pre-termination of the account is subject to penalties. |
Business CD Ladder Example
Here’s one way you could break down an investment of $8,000 using First Internet Bank’s rates as of Nov. 29, 2022. Visit the company’s website for the latest rate information.
Principal Amount | Term | APY |
|---|---|---|
$1,000 | 3 months | 2.02%% |
$1,000 | 6 months | 4.07% |
$1,000 | 12 months | 4.59% |
$1,000 | 18 months | 4.44% |
$1,000 | 24 months | 4.49% |
$1,000 | 37 months | 4.44% |
$1,000 | 48 months | 4.44% |
$1,000 | 60 months | 4.39% |
In this example, you might decide to skip the three-month CD because the APY is so much lower than the other terms. However, if you feel you’d like a portion of your reserves available in three months, you can take the lower return to have the liquidity of those funds sooner.
Despite what’s shown in the example, you don’t have to
- Invest the same amount in each business CD.
- Choose every CD length available.
- Open all the CDs at the same bank
Shop around and find the best rates for your business CD ladder.
If you don’t reinvest any of your funds once all the business CDs expire, your reserve would be completely liquid at the end of five years. However, each time a certificate matures, you can reinvest in a new CD if you don’t need to spend those reserves at that time.
You also have the option to move those reserves to a small business checking account, a business savings account, or a money market account if you need access to those funds in the immediate future.
How to Build a Business CD Ladder
Step 1: Decide the Amount of Business Reserves You Will Invest
Because the funds in a CD are unavailable until the CD matures, you need to decide how much of your business reserves you can afford to put in timed accounts. Make sure your short-term expenses are budgeted so that you know exactly how much you can invest.
Step 2: Decide How Many Business CDs to Open
While you can open several CD accounts as part of a business CD ladder, you don’t want to open so many that they become difficult to track. The easiest way is to keep consistent maturity dates with a similar amount of money invested in each CD. Having the CDs mature every six to 12 months allows you to plan for those funds to become available regularly.
Step 3: Determine the Maturity Terms of Each Business CD
You can choose to have your CDs mature at any interval offered by the bank. First Internet Bank, for example, offers maturity terms ranging from three months to 60 months. You want to choose terms that keep funds available regularly. For tracking purposes, having the CDs mature every six to 12 months is much easier to keep track of than opening them at different times and having them constantly become available.
Step 4: Open your Initial Business CDs
Once you have decided how much you want to invest and the maturity terms of the CDs, you can open your initial CDs. Keep track of the maturity dates of each CD when budgeting your business finances as this will allow you to know when reserves for spending or reinvestment will be available.
Step 5: Reinvest your Matured Business CDs or Place in Liquid Accounts
Once your business CD matures, you can reinvest them in a new CD at that time. Consider when you need those reserves to become liquid again and choose a CD length that matches your business needs. If you need the funds from a matured CD in the short term, you can transfer those funds to a business checking, savings, or money market account for immediate use by your business.
Frequently Asked Questions (FAQs)
Is CD laddering worth it?
Creating a business CD ladder can be worth it, as it allows you to earn interest on your business reserves without tying them up in long-term CDs. It helps you keep a portion of your reserves liquid, with staggered maturity dates freeing up funds for use or reinvestment.
How many CDs are in a CD ladder?
There can be any number of CDs in a business CD ladder. The key is keeping the number of CDs to an amount you can track easily. Opening too many CDs with staggered maturities might make it hard to monitor when those will mature and how much money will be available at any given time.
Having too few CDs might limit the benefits of a CD ladder to earn maximum interest on your reserves while keeping them regularly available for use. However many you choose, keeping the maturity dates set at a regular interval, such as every six months or every year, can make them much easier to track.
What is a good CD ladder strategy?
A good business CD ladder strategy is a solid mix of short-term CDs combined with long-term CDs. For example, you might open CDs that mature every three months for your short-term strategy. Those CDs won’t earn as much interest, but they’ll be available for use or reinvestment much sooner.
Combine those with longer-term CDs ranging from one to five years. Those will earn more interest but should be opened with funds you won’t need immediate access to, as you’ll have to pay a penalty to withdraw those funds early.
Bottom Line
A business certificate of deposit ladder is a great way to earn maximum interest yield on your business reserves while keeping a portion of those reserves available for use regularly. It’ll earn more money than keeping those funds in a business savings or money market account, and if you stagger the maturity dates of the CDs, you’ll still have access to those funds when your business needs them. Choose a wide range of maturities, and even banks, to find the best rates and maximize your return on your company’s finances.
