Maximizing Your Business Cash Reserves with CDs and Money Market Investments

In today’s financial landscape, it's crucial for businesses to make the most of their cash reserves. One effective strategy is investing in Certificates of Deposit (CDs) and money market accounts that offer interest. Let’s explore the benefits of these investment options and how they can help your business grow its cash reserves.

The Power of CDs and Money Markets

Certificates of Deposit (CDs) and money market accounts are secure, low-risk investment vehicles that offer higher interest rates compared to traditional business savings accounts. By investing your business's idle cash in these instruments, you can generate a steady stream of income without exposing your funds to significant risk.

Capitalizing on High CD and Money Market Rates

Currently CDs and money markets are yielding around 5% depending on the maturity.
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CD and money market rates are the highest they’ve been in over a decade, mainly due to rising inflation. Higher inflation leads to increased interest rates as financial institutions try to attract deposits. Historically, interest rates tend to peak right before recessions. Locking in these high rates now can be particularly advantageous. If a recession occurs and interest rates fall, you will continue to earn the higher rate for the duration of your CD’s term, providing a stable and predictable return on your investment.

Hypothetical Interest Earnings

To illustrate the potential benefits, let’s consider the annual interest earnings on a 5% CD for different investment amounts:

• $10,000 Investment: $10,000 x 5% = $500 annual interest
• $100,000 Investment: $100,000 x 5% = $5,000 annual interest
• $1,000,000 Investment: $1,000,000 x 5% = $50,000 annual interest

As you can see, even modest investments can yield substantial returns, providing your business with additional funds for growth and operations.

FDIC Insurance for Business Accounts

One of the primary concerns when investing business funds is ensuring their safety. The Federal Deposit Insurance Corporation (FDIC) insures CDs and money market accounts held in FDIC-member banks up to $250,000 per depositor, per insured bank, for each account ownership category. For businesses, this means each of your business accounts is insured up to $250,000 at each bank. If your total deposits exceed this limit, consider spreading your funds across multiple banks to fully benefit from FDIC insurance.

Mitigating FDIC Insurance Risk with Brokered CDs

Purchasing brokered CDs can further mitigate the FDIC insurance risk. When you buy brokered CDs through a brokerage account, you have the option to purchase CDs from multiple institutions. This diversification means you can spread your funds across various banks, ensuring that each CD remains within the $250,000 FDIC insurance limit. By doing so, you can protect your entire investment, even if it exceeds the insurance cap for a single bank, thus eliminating the risk of uninsured deposits.

Laddering CD Maturities

Another strategy to maximize the benefits of CDs is laddering their maturities. Laddering involves spreading your investment across multiple CDs with varying maturity dates. For instance, you could invest in CDs with 1-year, 2-year, and 3-year terms. As each CD matures, you reinvest the principal into a new CD with a longer term. This approach provides regular access to your funds, reduces interest rate risk, and ensures that a portion of your investment is always earning the highest available rate.

How to Buy a CD Using a Business Brokerage Account

Purchasing a CD through a business brokerage account is straightforward. Here’s a step-by-step guide:

1. Open a Business Brokerage Account: If you don’t already have one, choose a reputable brokerage firm and open a business account.
2. Fund Your Account: Transfer the amount you wish to invest from your business bank account to your brokerage account.
3. Research CD Options: Use your brokerage platform to research available CDs. Compare interest rates, terms, and FDIC insurance coverage.
4. Purchase the CD: Select the CD that best fits your business needs and complete the purchase through the brokerage platform.
5. Monitor Your Investment: Keep track of your CD's performance and interest earnings through your brokerage account dashboard.

It's important to note that CDs can be bought and sold on the open market and do not need to be held to maturity. Their value can fluctuate based on interest rate changes. If interest rates rise, the value of your CD may decrease, and if rates fall, the value may increase. This flexibility can provide additional liquidity options for your business, allowing you to manage your cash flow needs more effectively.

Conclusion

Investing in CDs and money market accounts is a smart way to enhance your business’s financial health. With the potential for higher interest earnings and the security of FDIC insurance, these instruments provide a reliable avenue for growing your cash reserves. 

Investment Disclaimer

The information provided in this newsletter is for educational purposes only and should not be considered as investment, tax, or legal advice. Every business's financial situation is unique, and you should consult with a professional financial advisor, accountant, or attorney before making any investment decisions.

Best regards,
​Daniel Johnson