Business CDs: how they work and key benefits

Your business banking tools likely include a checking and savings account, but have you considered adding CDs to the mix?

This investment option can be a smart choice for business owners who want to build their savings and plan for the future, says Taylor Genz, Vice President of Business Banking for U.S. Bank.

“CDs have been a major topic of conversation lately,” he says. “Rates are increasing, and CDs offer benefits that businesses with extra money can leverage.”

What are business CD accounts?

Business CD accounts are specialized financial products designed for businesses to invest their surplus funds with a guaranteed rate of return over a fixed term.

These accounts are ideal for companies looking to safely park their excess cash, as they typically offer higher interest rates compared to standard savings or money market accounts.

The key feature of a business CD is its fixed term, ranging from a few months to several years, during which the funds remain deposited with the bank. This fixed-term investment ensures a predictable and stable return, making it a secure option for businesses to grow their reserves without the risks associated with more volatile investments.

How do business CDs work?

Business CDs allow companies to deposit a lump sum of money for a predetermined period at a fixed interest rate. The duration of CDs can vary, typically ranging from a few months to several years, with longer terms usually offering higher interest rates.

During the term of the CD, the business cannot access the funds without incurring a penalty, which ensures a higher and steady interest rate. At the end of the term, the business receives the original amount deposited plus the accrued interest. If you withdraw money before the end of the term, you'll be required to pay a penalty.

Benefits of business CDs

So, what are these benefits of business CDs? For one, CDs provide a higher return than a traditional savings account. Investors can lock in a guaranteed interest rate for a set period, making them a lower-risk option.

CDs are also flexible. You can choose the amount to invest, starting at $500 and going up to $250,000, then select the term, which ranges from one month to five years. The CD reaches maturity at the end of the term, and you can either withdraw the funds or reinvest them in another CD.

The FDIC also insures CDs for up to $250,000. This protection makes CDs safer than other types of investment, such as stocks, which are not insured against losses.

Different types of business CDs

Business CDs differ from consumer CDs only in ownership. Instead of being titled to an individual, they are formed in the business's name. Like consumer CDs, business owners have a few types to choose from.

• Standard CDs are the most common, offering fixed rates and terms. The rate you are given at the time of your deposit stays the same until the CD matures.
• Step-up CDs offer a set interest rate at the start of the term. Unlike a standard CD, though, the rate will increase at set times over the life of the CD. For example, if you get a 28-month CD, the interest rate rises at the 7-, 14-, and 21-month milestones. A step-up CD can be a good choice in a market with rising interest rates.
• Trade-up CDs also allow investors a chance to change their interest rates. With this type of CD, you start the term with a lower interest rate than standard CDs offer. However, you can opt for a higher rate once during the term if the market rises. This CD helps you avoid locking into a single rate in a fluctuating market environment.

CD saving strategies

CDs are well-suited to support business owners and their short- and long-term investments. For example, CDs are great ways to stick to your savings goals, as they provide forced behavior modification, says Genz.

“If you’re a business owner and you're prone to emotional buys,” he says, “CDs make sure you save that money and not spend it, since you’ll be charged a penalty for early withdrawal.”

CDs also help business owners plan for long-term purchases. If you will make a capital investment in 18 months, putting money into an 18-month CD ensures it's there when you need it.

Taking advantage of the variety of term lengths can also become a savings strategy. Investors can purchase multiple CDs with varying maturity dates, a tactic called “laddering.” For example, you can purchase a six-month, one-year, three-year and five-year CD to access funds at various times without risking a penalty for early withdrawal. Laddering can be beneficial when interest rises, as you can lock in higher rates on new CDs.

“If you have excess cash, laddering could be a savvy way to earn more on that cash while keeping emergency funds available in a rolling way,” says Genz.

Benefits of business CDs

So, what are these benefits of business CDs? For one, CDs provide a higher return than a traditional savings account. Investors can lock in a guaranteed interest rate for a set period, making them a lower-risk option.

CDs are also flexible. You can choose the amount to invest, starting at $500 and going up to $250,000, then select the term, which ranges from one month to five years. The CD reaches maturity at the end of the term, and you can either withdraw the funds or reinvest them in another CD.

The FDIC also insures CDs for up to $250,000. This protection makes CDs safer than other types of investment, such as stocks, which are not insured against losses.

How do business CDs compare to other options?

When comparing business CDs to other financial options, the main distinctions lie in their risk profile and liquidity. Business CDs offer higher interest rates than traditional savings or money market accounts, making them more appealing for long-term savings with a known rate of return. However, unlike money market accounts, CDs lack liquidity due to their fixed terms, meaning businesses can't access these funds without penalty before maturity.

This contrasts with more flexible options like business savings or money market accounts, which allow for easier access to funds but typically at lower interest rates. Compared to investing in the stock market or other securities, business CDs present a lower-risk alternative, as they offer a guaranteed return without the volatility of the markets. This makes them a suitable choice for businesses looking for a stable, low-risk investment to balance their portfolio.

Is a business CD right for your business?

CDs could be a good choice if you have money in savings that you don't need right away. However, if your business has unpredictable costs, a CD may not be the best savings vehicle, says Genz.

“While the supply chain has somewhat stabilized, depending on the industry, the price of materials can jump up and down,” he says. “You want to make sure you don’t have too much money tied up in a CD if your costs spike. It’s important to be thoughtful about the variability of your expenses before you lock in funds.”

In addition, if your spending plans for the next few months or years are uncertain, or if you know you'll need to withdraw savings soon for a major purchase, there may be better choices than a CD. The penalties you'll pay for early withdrawal can negate the account's value.

“Working capital engagement is a real differentiator in the success of a business,” says Genz. “The ability to pay your vendors quickly, for example, may get you discounts on supplies and materials. It’s important to create a good balance that improves the financial health of your business so you can take advantage of opportunities that may come your way.”

CDs can be part of a sound financial plan. Start by  comparing rates for U.S. Bank Business CDs today.