What Is APY In Business Banking & How To Calculate It
This article is part of a larger series on Business Banking.
The annual percentage yield, or APY, is a measure of the amount of money you will earn on a business checking or savings account over one year. The APY will always be slightly higher than the stated interest rate because it compounds on itself. In other words, you can earn interest on previously earned interest with APY.
APY is important because it allows you to compare potential earnings from a bank account without knowing the compounding frequencies of each account. This allows you to compare interest-earning accounts at a glance.
If you are looking for a business checking account that can earn you interest, Bluevine is an excellent choice. You can earn 2.0% APY on qualifying balances of $250,000 or less. Visit Bluevine for more information or to open an account.
APY vs APR: While APY and annual percentage rate (APR) are both calculations of interest, they serve different purposes. APY tells you how much interest you will earn on a deposit account in a year, and APR tells you how much interest you will pay on a loan or line of credit over a year. In short, APY gives you money earned on deposits, while APR gives you the cost of borrowing money.
APY Formula & How APY Is Calculated
The APY formula for business is:
APY = [(1+r/n)n]-1
r = stated interest rate
n = number of compounding periods in one year
To calculate APY, follow these steps:
- Step 1: Divide the stated interest rate in decimal form by the number of compounding periods per year.
- Step 2: Add one to the figure in Step 1 and take the value to the power of the number of compounding periods.
- Step 3: Subtract one to get the decimal value of APY, which can then be converted into a percentage.
If you have an account that has an interest rate of 4% and the interest compounds monthly, the APY would be calculated as follows:
APY = [(1+r/n)n]-1
APY = [(1+0.04/12)12]-1
APY = [(1.00333)12]-1
APY = 1.0407-1 = 0.04074, or 4.074% APY
If you have the same account with a 4% interest rate but the interest compounds daily, the APY would be calculated as follows:
APY = [(1+r/n)n]-1
APY = [(1+0.04/365)365]-1
APY = [(1.0001096)365]-1
APY = 1.04081-1 = 0.04081, or 4.081% APY
Using an APY Calculator to Determine Your Earnings
Regardless of which type of account you choose, you can calculate how much you will earn in a compounding period using our money market calculator below.
To use it, you will need to know your daily average balance at the end of the billing (or compounding cycle), your end-of-cycle balance, the interest rate on the account, and the number of compounding periods in a year. Input those values into our calculator to figure out how much money you have after the interest earnings are added to your end-of-cycle balance.
What You Need to Know About APY in Business Banking
Before finding a business account, it is important to understand exactly what you should consider when choosing an account and how much money you will earn from APY in your business bank account.
What a Good APY Is for Your Business Bank Account
What constitutes a good APY will depend on the type of account you are looking to open. Business checking accounts typically have lower APY than savings accounts. Here are general guidelines for a good APY for specific account types:
- Business checking account: Many business checking accounts do not offer APY. Any APY higher than 1.0% in a business checking account is a good APY. Our roundup of the best business checking accounts includes a few accounts offering APY.
- Business savings account: In a savings account, any APY higher than 2.0% is a good APY. There may be more restrictions on the balances that earn interest, so know that information before opening an account. See our list of the leading business savings accounts.
- Business money market account: Typically the highest-earning account, an APY of 3.0% or better is a good APY. Our guide on what a business money market account is explains how the account works and any costs associated with it.
Fixed APY vs Variable APY
Before choosing an account, find out whether the account has a fixed or variable APY. Fixed APY means the rate you earn will not change with market conditions, whereas variable APY means rates can increase or decrease as the market changes. Checking accounts typically have more fixed APY, while savings and money market accounts typically have variable APY rates.
When you are ready to open a business bank account, regardless of whether it is a checking or savings account, you should consider finding an account that offers a high APY. This will allow you to earn income on your financial reserves.
For step-by-step guidance and tips, refer to our articles on how to choose a business bank and how to open a business bank account.
How APY Differs From Interest Rate
While some people may use the terms “interest rate” and “APY” interchangeably, they are different:
- The interest rate is the percentage of the savings account balance the bank will pay the business owner for keeping their money in the account.
- The APY is also a percentage of the amount the business owner earns on reserve balances. However, it takes into consideration the amount of compounded interest already earned on the account. In other words, APY is reflective of the amount of interest earned on both the reserves deposited and the previously-earned interest. Because it included previously earned interest in the calculation, the APY will always be slightly higher than the stated interest rate.
How To Find a Bank That Has a High APY
Finding a bank with a high APY is pretty easy. Banks are required by the Consumer Financial Protection Bureau to state rates of return in terms of APY. And with interest rates currently high, banks are competing to offer the highest rates of return to business customers.
Here are three things to remember when looking for a bank with a high APY:
- Consider online banks: Because online banks don’t have the overhead costs that traditional banks have, they can offer higher rates of return on savings accounts.
- Watch out for introductory rates: Some banks will offer outstanding introductory APY on savings accounts, but then rates revert to a much lower APY after six to 12 months.
- Decide how liquid you need your funds to be: If you have reserve funds that you don’t need to use, you can consider savings, money market, or certificate of deposit (CD) accounts, which will have higher APY. If you have funds you need to use frequently, an interest-bearing checking account is a better option. Even though it will have a lower APY, you won’t risk fees for excess transactions.
Banks Offering APY on Business Accounts
The best banks for small businesses offer APY on both business checking and savings accounts. Listed below are examples of providers offering good APY rates on both types of accounts.
Business Checking Accounts With APY
Account | APY* | Monthly Fee | Cash Deposit Fee | |
|---|---|---|---|---|
 | Business Checking | 2.0% on qualifying balances of $250,000 or less | None | $4.95 per deposit (Green Dot locations) |
 | Innovator Business Checking |
| None | Cash deposits not accepted |
 | Business Checking | 0.5% on balances of $10,000 or more | None | Cash deposits not accepted |
Note: APY rates were accurate at the time of publication. Rates will fluctuate as the Fed raises or lowers interest rates. Visit the provider’s page for the most current APY rates before opening a checking account. | ||||
Business Savings Accounts With APY
APY* | Monthly Fee | Free Monthly Transactions | Free Cash Deposit Limit | |
|---|---|---|---|---|
 | 4.00% | None | No limit | No cash deposits |
 |
| None | 6 | None |
|
| $2 (savings) or $5 (MMA); waivable | 6 | None |
Note: APY rates were accurate at the time of publication. Rates will fluctuate as the Fed raises or lowers interest rates. Visit the provider’s page for the most current APY rates before opening a savings account. | ||||
Frequently Asked Questions (FAQs)
APY on a business account works the same way it does on a personal account. It calculates the interest earned by a deposit account over an entire year. It is higher than the stated interest rate because you can earn interest on previously earned interest.
Yes, your business bank account can earn interest. Interest-earning checking accounts are less common, although providers such as Bluevine and Grasshopper offer solid interest returns on business checking accounts. Higher rates of return will be found on business savings and money market accounts. Live Oak Bank and Prime Alliance Bank have solid returns on business savings, while First Internet Bank has a strong return on its money market account.
Bottom Line
The APY reflects the interest your business bank account will earn over a year. The higher the rate, the more interest you will make. It is essential to know how often the interest is compounded as accounts compounded daily will earn more interest than accounts compounded monthly or quarterly. Look for an account that offers a strong return on investment to allow your reserves to earn your company money.
