What Is a Business Money Market Account & How It Works
This article is part of a larger series on Business Banking.
A business money market account (MMA) is an interest-bearing business bank account that typically earns interest at a higher rate than business savings accounts. However, money market accounts earn less interest than investment accounts because they are considered low risk.
While the Federal Reserve Board officially lifted the six-transaction limit on money market accounts in 2020, some banks have kept the limit in place. Other banks have either increased the limit or eliminated it. Like other deposit accounts, money market accounts are Federal Deposit Insurance Corporation (FDIC)-insured up to $250,000 per account holder.
If you’re looking to open a business money market account, First Internet Bank is an excellent choice. You can earn an annual percentage yield (APY) of 1.51% with a daily balance of $5 million or less and 2.27% with a daily balance above $5 million. The account has an easily waivable monthly fee, and sole proprietors can get an ATM card. Visit First Internet Bank’s website for more information.
How Business Money Market Accounts Work
A business money market account can be funded via automated clearing house (ACH) transfer, check or cash deposit, or incoming wire transfer. Once the money is in your account, you can leave it to draw interest, withdraw it, or transfer it to another account.
In general, most financial institutions still limit the number of withdrawals or outgoing transfers to just six per month. You’ll be charged an excess transaction fee if you exceed six transactions. In extreme cases, the bank may reclassify your account, which could cause you to lose the interest-bearing nature of the account.
To calculate how much money you’ll make monthly, you’ll need to know what period the bank uses to compound the interest, the APY earned by the account, and your daily average balance:
- Compounding time period: The amount of time the bank uses to determine how often interest is compounded. In most cases, interest is compounded monthly.
- APY earned: This is the annual percentage yield earned by the account. It’s slightly higher than the stated interest rate because you can earn interest from the account’s already accrued interest.
- Daily average balance: Generally, this is calculated by taking the sum of the daily balance of your account in a billing cycle and dividing it by the number of days in that billing cycle.
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 [(r/100)/n] + E
D = Daily average balance at the end of the billing cycle
E = End-of-cycle balance at the end of the billing cycle
r = APY
n = number of compounding periods in a year (in this case, 12)
Calculator
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.
Example 1
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 money market account 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
Example 2
Your daily average balance at the end of the quarter is $20,000, and an end-of-cycle balance of $25,000. Your business money market account 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
Business Money Market Account Costs
There are limited costs involved with money market accounts, and some of them can be waived if you meet certain requirements. Here are some more common fees you may see with your money market account for business:
- Monthly account fees: Account fees range from $5 to $15 per month. Most can be waived if monthly balance minimums are met.
- Transaction fees: If your bank still has a monthly transaction limit, you could pay $15 per excessive transaction or more. Your account could also be reclassified into a noninterest earning account.
- Wire transfers: Some accounts will charge wire fees ranging from $15 to $50 per transaction.
- Cashier’s checks: This can be up to $15 a piece for cashier’s checks.
- Dormant account fee: If your account becomes inactive or dormant, you could be charged fees. Be sure to conduct transactions into your account at least once a year to avoid these fees. If you aren’t going to use an account, be sure to close your account to avoid fees and potential unclaimed funds issues.
Pros & Cons of a Business Money Market Account
| PROS | CONS |
|---|---|
| You earn strong interest returns on your business reserves | Some accounts have high minimum balance requirements that might result in monthly fees or limited interest earning |
| It is a low-risk investment, with funds insured by the FDIC for up to $250,000 | Penalties for exceeding six monthly transactions can include fees or account reclassification |
| Some banks have relaxed or removed monthly transaction limits | Inflated introductory rates with some banks could have you looking for a new account after the intro period ends and APY drops |
Business Money Market Accounts vs Other Accounts
There are other types of business bank accounts that allow you to earn interest on reserve business funds. In addition to business money market accounts, you could choose to open a high-yield business savings account or a business certificate of deposit (CD). The table below compares some of the differences among the three account types:
Business Money Market | |||
|---|---|---|---|
Best For | Businesses with large reserves they don’t need regular access to | Businesses with smaller reserves they might need to access regularly | Businesses with very large reserves that they won’t need to access for months or years |
Interest Rate Offered | Similar to, but usually higher than, savings; lower than CD | Similar to, but usually lower than, money market; lower than CD | Highest of the three |
Liquidity of Funds | Can withdraw funds anytime; subject to monthly transaction limits | Can withdraw funds anytime; subject to monthly transaction limits | You are unable to withdraw money for a fixed period; early withdrawal penalties are very high |
Check Writing Capabilities | ✓ | Usually no | ✕ |
Relative Minimum Deposit | Highest of the three | Often the lowest | Similar to money market but higher than savings |
How To Open a Business Money Market Account
The steps to opening a business money market account are similar to opening any business bank account. If you already have a small business checking account with a provider, check with it first to see if it offers a money market account. Since it already has your business information, the opening process should be much easier.
Otherwise, here’s a general list of what documents you’ll need:
- Employer identification number (EIN) or Social Security number if you’re a sole proprietor
- Fictitious business name certificate or doing-business-as (DBA) certificate
- Business formation documents
- Organization documents, including your ownership agreements
- Business licenses
- Government-issued photo ID, such as a passport or driver’s license
Frequently Asked Questions (FAQs)
How does a business money market account work?
A business can transfer financial reserves into a business money market account. That money will earn interest, typically at a higher rate than a business savings account but lower than a business CD or investment account. It carries far less risk than investment accounts as the FDIC insures them for up to $250,000.
What are the disadvantages of a money market account?
Three main disadvantages to a business money market account are:
- Some business money market accounts have a high minimum deposit or balance requirements. Failure to meet the minimum balance requirements could result in monthly fees or limited interest earnings.
- There can be significant penalties for exceeding the maximum monthly withdrawals or transfers out of the MMA—they can be hefty fees or even the reclassification of the account into a noninterest-earning account.
- Banks often offer inflated introductory rates, which then drop significantly once the intro period expires. Once the rate changes, this could leave you looking for a new business MMA provider.
Can a business use a money market account?
Any business can use a money market account to earn interest on the company’s financial reserves. Not all banks with business banking products offer business money market accounts. Visit your bank’s website to check.
Bottom Line
A business money market account is an excellent way for your company to earn interest on its financial reserves. A money market account typically earns more than a business savings account but less than a business certificate of deposit or investment account. However, CDs lack the liquidity of money market accounts, and investment accounts carry a higher risk. Business money market accounts are a solid choice for a good interest yield in a low-risk account.
