Money Market vs CD: Which Is Best for Your Business?
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.
Business money market accounts and certificates of deposit (CD) are deposit accounts that allow you to earn interest. A money market account combines the functionality of both savings and checking accounts, while a CD is a term deposit that offers a fixed interest rate upon maturity. The best account for your business depends on your savings goals and liquidity requirements.
When to Use a Money Market
It’s best to use a business money market account if you want to earn interest from a savings account that also works like a checking account. This account is suited best for business owners who can meet the high minimum balance requirements―interest rates are generally tiered and increase as your balance increases―and need the ability to write a few checks in a month. Money market accounts are also a better option if you need access to your funds because they typically allow up to six withdrawals per month without fees.
| PROS | CONS |
|---|---|
| Has the ability to write checks | Higher minimum balance requirements |
| Safe and secured | Withdrawal limits |
| Earns interests | Monthly fees |
When to Use a CD
A certificate of deposit is a timed deposit that earns a fixed interest rate for a predetermined term. It’s best to use a CD if you have extra funds that you do not need to access for a certain period of time and if you can commit to keeping your money in the account until maturity. Certificates of deposit usually offer higher interest rates compared to money market accounts. However, you won’t be allowed to withdraw your money without penalty before the term ends.
| PROS | CONS |
|---|---|
| Higher interest rates | Your funds will be locked in for a certain period |
| Safe and secured | Subject to pretermination penalties |
| A variety of term options available | Inflation risk |
Similarities of Money Markets & CDs
Both CDs and money market accounts allow you to earn interest from your deposits. They are safe and secured because both are covered by FDIC insurance when you open an account in a federally insured bank. Banks typically require a minimum balance for both certificates of deposit and money market accounts; however, the balance requirement may vary from bank to bank.
Differences Between Money Markets & CDs
The main difference between a money market account and a certificate of deposit is the ease of access to your funds. While money market accounts typically limit withdrawals to up to six per month, CDs don’t allow withdrawals without terminating your account. Pretermination of a certificate of deposit is subject to penalties.
With a certificate of deposit, you are required to make one initial deposit that should stay in the account until the term ends. You are not allowed to make additional deposits on a CD before the maturity date. Meanwhile, you can deposit funds to a money market account anytime. Money market accounts allow you to write a limited number of checks per month, and they usually come with an ATM card while a CD doesn’t come with an ATM card or check-writing ability.
Due to the pandemic, the Federal Reserve Board has negated the transaction limitations on savings instruments. This change currently allows a money market account to operate in the same manner as a checking account with no limitation on the number of checks that can be written to access your funds.
Money Markets vs CD Comparison
Money Market | CD | |
|---|---|---|
Annual Percentage Yield (APY) | 0.01% to 0.75% with tiers based on account balance | 0.01% to 1.40% fixed at the time of account opening |
Account Fees | $5 to $20 | Typically no monthly fees; penalties apply for early withdrawals |
Deposits | Usually allowed | Not allowed; you should make a fixed deposit upon account opening―this will be the principal amount |
Withdrawals | Up to six times per month; however, the Federal Reserve Board announced an interim final rule to allow an unlimited amount of withdrawals or deposits from money market and savings deposits | Allowed after maturity. Partial withdrawals are not allowed―you need to preterminate the account to withdraw your money before maturity, which is subject to penalties |
Eligibility Requirements | Business and personal documents | Business and personal documents |
Money Market vs CD: Annual Percentage Yield
Money market accounts offer interest based on your balance. For example, money market account balances of $1,000 and below will earn an APY of 0.15%. In the next tier, the balance requirements are between $1,000 to $10,000 and the bank pays an APY of 0.25%; and then for anything above $10,000, the APY increases to 0.30%. Please note that the tiers vary from bank to bank.
However, the APY of certificates of deposits varies depending on your term and principal amount. For example, a bank offers an APY of 0.25% for a business CD with a three-month term, 0.45% for a six-month term, 0.60% for a one-year term, 0.80% for a three-year term, and 0.96% for a five-year term. The minimum balance requirement and interest rates vary depending on the bank.
Money Market vs CD: Deposits & Withdrawals
Certificates of deposit don’t allow additional deposits once the account is opened, and you cannot make partial withdrawals from the account. You either have to wait for the maturity date to withdraw your money, or you have to preterminate your account, subject to pretermination penalties.
Meanwhile, money market accounts allow additional deposits, and you can write a limited number of checks and make up to six withdrawals per month. However, the Federal Reserve Board recently announced an amendment to the interim final rule that allows unlimited withdrawals from money market accounts due to the COVID-19 pandemic.
When to Use a Business Savings or Business Checking Account
While certificates of deposit and money market accounts generally offer better interest rates, they aren’t designed for all business owners. It’s best to use a regular business savings or business checking account if you cannot maintain the high minimum balance requirements of CDs and money market accounts. Business checking and savings accounts are also a better option for businesses that need fluid access to their funds. You can also find some best banks for businesses that offer APY for savings and checking accounts.
Bottom Line
Money market accounts and CDs offer a safe place to save your extra business funds while earning interest. CDs are a good option if you don’t need to use your money for a certain period while money market accounts are suited best for businesses that also need the functionality of a checking account. Understanding how each account works will help you choose the one that is best for your business.
