Businesses work hard to make a profit. That money, in turn, should work hard too. Savings and low-risk investments are among the ways businesses can help protect the money they have earned. Trusted financial institutions are available to assist you with choosing saving strategies that align with your business’s needs and goals.
Panelist: David Weed, AVP of business lending at Service Credit Union, servicecu.org
Q: What is the most underused savings product for businesses?
By far, share certificates! Share certificates are like CDs (certificates of deposit), but in the credit union world, because we are member owned, your investment pays dividends, not interest, which is why the names are different.
Many people think of certificates as an old-school way to stash away money for personal purchases, but there’s no reason businesses shouldn’t also take advantage of certificates as a savings vehicle, especially with current rates higher than they’ve been in years. At Service CU, we have many flexible options when it comes to term length, including 6- and 12-month options, so you can grow your money without it being inaccessible for too long of a time. Plus, the money in a certificate is safe up to $250,000 with the NCUA (National Credit Union Administration). It’s a low/no-risk way to easily grow your funds.
Q: Should businesses have a saving account?
Yes, absolutely! Having a dedicated account for savings can help you reach your financial goals while also ensuring that you have enough money tucked away in case of an emergency.
We all know that unexpected expenses can arise any time in business. By maintaining a separate savings account, you can build up an emergency fund to handle costs such as equipment repairs, unexpected bills, or sudden dips in revenue without adding to your debt.
A savings account also allows you to accumulate surplus funds and earn interest on your balance. Instead of keeping all your business earnings in a checking account, transferring excess funds to a savings account helps your money grow passively over time. This way, you can leverage the power of compounding and potentially earn additional income from the interest generated by your savings.
Last but not least, a savings account can serve as a backup in case of unexpected overdrafts in your checking account. If you accidentally make a payment or write a check for more than your available balance, you can transfer money from you savings account to your checking to avoid potential overdraft fees and maintain a positive cash flow.
Q: What’s the best type of savings account to have?
In addition to putting some money in share certificates, I recommend having both a standard primary savings account as well as a Money Market account, which will help grow interest on larger balances.
Q: What happens if you do need to make a large purchase that you don’t have enough saved up for?
Having a revolving line of credit (LOC) is a great way to get access to short-term funding for large purchases, or even to cover payroll. For the first three years of an LOC, you can repeatedly draw on available funds and pay them down. You will pay interest on the amount borrowed, with interest-only payments due monthly. This is followed by a four-year repayment period with fixed monthly payments.
Q: When does it make sense to use an LOC versus a credit card?
A business credit card should be used for everyday purchases that can be paid off at the end of the card’s billing cycle. It’s also great for earning points for those everyday purchases. An LOC, on the other hand, will carry a lower interest rate than a credit card in the case that you cannot pay off the card right away, which is why it should be reserved for higher-cost purchases, or for a time when you do not have immediate access to funds to pay for those purchases.
