A business money market account (MMA) is a flexible, low-risk method of saving money while maintaining access to the funds you have on deposit. It functions like a savings account by offering an APY equal to or higher than most regular business savings accounts. It has features similar to a checking account, such as check-writing capabilities and a debit card, making it easy to withdraw funds. A business money market account combines the best of both worlds.
With those perks, you may encounter a few conditions attached to the account, such as the following:
- A minimum balance required to open the account
- Potential monthly fees if your minimum daily balance falls below a certain amount
- Varying interest rates based on different balance tiers—where higher balances earn higher interest
- Limits on the number of withdrawals per statement cycle or quarter
Business Money Market Interest Formula, Calculator & Examples
To calculate the money market interest and the final balance of your account after the interest is added for one month, use the formula below:
Final Balance | = | D | x | r ÷ 100 | + | E |
n |
- D = daily average balance at the end of the billing cycle
- r = APY
- n = number of compounding periods in a year (in this case, 12)
- E = end-of-cycle balance at the end of the billing cycle
You can also use this business money market interest calculator to determine the balance of your account at the end of the billing cycle after interest earnings are added.
Let’s say your daily average balance at the end of the month is $10,000, and you have an end-of-cycle balance of $15,000. Your business MMA has an APY of 1.5% and is compounded monthly. To figure out how much money will be in the account after the interest is added, follow these steps:
- Step 1: Divide 1.5% by 100 to get the APY in decimal form = 0.015
- Step 2: Take 0.015 and divide by 12 (number of compounding periods in a year) = 0.00125
- Step 3: Multiply 0.00125 by the daily average balance ($10,000) to calculate the interest earned = $12.50
- Step 4: Add $12.50 to the end-of-month balance ($15,000) to get the final total = $15,012.50
In formula form:
D × [(r ÷ 100) ÷ n] + E
$10,000 × [(1.5 ÷ 100) ÷ 12] + $15,000
$10,000 × (0.015 ÷ 12) + $15,000
$10,000 × 0.00125 + $15,000
$12.50 + $15,000 = $15,012.50
Your daily average balance at the end of the quarter is $20,000, and an end-of-cycle balance of $25,000. Your business MMA has an APY of 2.5% and is compounded quarterly. To figure out how much money will be in the account after the interest is added, follow these steps:
- Step 1: Divide 2.5% by 100 to get the APY in decimal form = 0.025
- Step 2: Take 0.025 and divide by 4 (number of compounding periods in a year) = 0.00625
- Step 3: Multiply 0.00625 by the daily average balance ($20,000) to calculate the interest earned = $125.00
- Step 4: Add $125.00 to the end-of-month balance ($25,000) to get the final total = $25,125.00
In formula form:
D × [(r ÷ 100) ÷ n] + E
$20,000 × [(2.5 ÷ 100) ÷ 4] + $25,000
$20,000 × (0.025 ÷ 4) + $25,000
$20,000 × 0.00625 + $25,000
$125.00 + $25,000 = $25,125.00
How Money Market Accounts for Business Work
A business money market is usually structured in tiers, and each ascending tier will pay a higher interest rate than the lower tier. Every bank sets its own tier requirements.
Once you have an account, you will need to fund it. There are many ways to add money to it.
- If you open the account in person, you can bring cash or a check. Since most money market accounts only require $100 to open, you can deposit that amount while you’re there.
- If you open the account online, you can choose from a variety of electronic funding options. The most popular methods are sending a domestic wire, initiating an Automated Clearing House (ACH) transaction, and doing a direct transfer through an app. The bank often will provide its preferred method to receive the funds.
If you decide to add funds to the account later on, you will need to ask the bank how it accepts deposits. Some will allow you to send a wire, transmit an ACH, or make an in-person deposit.
The easy part about a money market account is the ability to add funds and withdraw without waiting for a maturity period to pass. One thing to remember is the withdrawal rules that apply to the account. Most banks have a limit on the number of withdrawals you can make in a statement cycle.
Money Market Account Types
If you’re considering placing your funds in a money market account, it’s important to know there are two types: a money market account and a money market fund. The names are very similar, so it’s easy to get these products confused.
- A money market account is something you will open at a bank or credit union and is considered a low-risk deposit account. It is insured up to $250,000; if it’s opened at a bank, then it’s covered by the Federal Deposit Insurance Corporation (FDIC), and if it’s opened at a credit union, then it’s covered by the National Credit Union Administration (NCUA).
- A money market fund is generally managed by an investment firm and is an investment that always comes with a measure of risk. Also, it does not come with any type of insurance.
Business Money Market Account Costs
The costs associated with a money market (1) are relatively minimal if you keep your account within the policy guidelines and (2) tend to grow when the account rules are violated. Here are a few common fees you may encounter:
- Monthly account fees: Many banks have a specific fee schedule for their money market accounts. Usually, there is a free option if you maintain a minimum balance. Falling below that minimum required balance during the statement cycle could trigger a fee, which generally ranges from $5 to $55.
- Cashier’s checks: If you request a withdrawal from your business money market as a cashier’s check, you may be charged a courtesy fee, which ranges from $5 to $20. Many banks will waive this fee or give you a certain number of cashier’s checks at no charge.
- Wire transfers: This fee can occur for two reasons.
- Receiving an incoming wire
- Incoming wire transfer fees can be as low as $0, depending on your account perks, for a domestic wire or as high as $50 if you’re receiving an international wire.
- Transmitting an outgoing wire
- Outgoing wires usually start at around $15 and can go up to $50.
The bank does quite a bit of legwork in the background to process these wires, so fees are generally assessed in both situations.
- Transaction fees: It’s the discretion of the bank to set a deposit withdrawal limit since Regulation D was updated in 2020. If the bank enforces a limit, you will be charged a fee if you exceed it. This is considered a penalty for excessive withdrawals and can be as low as $5 or as high as $15. Remember, there is no fee for making deposits—only for making more withdrawals than allowed.
Pros & Cons of Money Market Accounts for Business
| PROS | CONS |
|---|---|
| The initial opening deposit is low. | Transactions are limited. |
| They are federally insured up to $250,000. | Fees are charged if the balance falls below the minimum. |
| They provide perks of checking and savings accounts in one. | Monthly maintenance fees are charged. |
| They have higher APYs. | Rates change based on which tier your balance falls in. |
| They allow quick access to cash at branches and ATMs. | Inflated introductory rates with some banks will adjust to a very low rate after the introductory period. |
How to Open a Business Money Market Account
Opening a business money market account is similar to opening a checking or savings account. If you already have an account with a bank you like, check if it offers money market accounts and what its account guidelines are.
However, there may be reasons to seek out a different bank. If you have over $250,000 already on deposit at your current bank, you will need to search for another bank to make certain your deposits are insured. If you have less on deposit, you may find it convenient to continue working with the bank you have already built a relationship with.
If you are starting a relationship with a new bank, you will need to provide some additional information. It’s also a good idea to bring all the signers with you so that the bank can collect their information and add them to the signature card.
When starting a relationship with a new bank, you will need to bring the following information:
- Business formation documents for LLC, S-corp, C-corp, or partnership
- For a DBA account (Doing Business As), you will need the name you are calling the business along with your personal information
- Employer Identification Number (EIN) or Social Security number if you are a sole proprietor
- Information on the signers, owners, and beneficial owners of the business
- Legal identification such as a current driver’s license, ID card, or passport for all signers
Other Business Savings Accounts
There are four basic types of accounts for businesses, including the business money market. All these products allow you to save money, but each has its policies governing them.
1. Business Savings Account
A business savings account is great for the business owner who has money to save but also needs to have constant access to it if needed. It tends to pay a bit less interest than business money markets and business certificate of deposit (CD) accounts. The lower restrictions make this a great account for a growing small business.
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2. Business Certificate of Deposit
A business certificate of deposit (CD) is also referred to as a timed deposit. This is due to the fact that the rates are based on the term of the CD, with the shortest term being three months and the longest at five years.
CDs are good for businesses with cash reserves that will not be needed immediately. Since the deposits are set on a timer or term, withdrawing the funds early results in substantial fees. CDs do pay higher interest rates since you are agreeing to leave the funds on deposit undisturbed for an extended period.
3. Business Checking Account
A business checking account is a great option for daily banking needs and for storing working capital with funds you need immediate access to regularly. Some banks offer interest-bearing business checking accounts if you meet the account requirements.
Checking accounts allow withdrawals in many different ways. You can write physical checks, use bill pay, send wires or ACH files, and transfer funds through online banking.
Frequently Asked Questions (FAQs)
A money market is a savings account structured in such a way that provides the convenience of a checking account and the high-yield interest of a savings account. It’s similar to a checking account since it comes with check-writing capabilities and a debit card, making withdrawing funds easy. It’s also similar to a savings account since it generally pays a higher APY. The foundation of a money market is organized into tiers, with lower balances earning a lower interest rate and higher balances earning a higher interest rate.
A business savings account pays a flat rate on the funds you have on deposit, whereas a business money market is usually structured in tiers. A lower-tier may be $0-$9,999, and the next tier could run from $10,000-$25,000, depending on the requirements set by the bank. Each ascending tier will pay a higher interest rate than the lower tier. Unlike a regular business savings account, a money market comes with check-writing capabilities and allows debit card use.
- Withdrawal limits on money market accounts are set by the bank.
- Money markets charge fees if the criteria are not followed exactly.
- Most money markets have a minimum balance requirement.
- Falling below a certain balance could lower the tier at which your interest is calculated, resulting in a lower interest rate.
- Deposit insurance is capped at $250,000 because of the FDIC insurance regulations.
Bottom Line
A business MMA is a low-risk way for businesses to earn interest on cash reserves while maintaining access to the funds if needed. The interest rate is usually higher than a regular savings account but less than a CD. MMAs allow access to funds without penalty if you follow the bank’s guidelines. If you need them, you will also receive physical checks for withdrawals and a debit card for ATMs.
