Note: This post has been guest authored by Jess Holmes an Arizona lifestyle blogger who loves helping others by providing useful content to readers. Though she covers all topics, finance is where her love for writing lies.
Every company manages its finances through the bank by a general account. This is not the only financial product organizations can take advantage of. For example, similar to personal savings, a business could set aside some money as reserves or save for reinvestments. Meanwhile, these funds should be placed in a type of account which generated some interest.
A traditional savings account is usually set for a fixed period, ranging from one month to a couple of years, up to 5 or 10. Of course, the interest is better for more extended periods, but the money is also blocked if suddenly the company needs them.
There is, however, a middle-ground product, similar to a savings account, but which retains the flexibility of a current account called a money market account.
Flexibility
The great news is that the interest paid for these accounts is higher than that for current accounts and you can deposit and withdraw at any time. As long as you keep the money in the bank, they accumulate interest, paid monthly.
Also, if you need to withdraw the money to cover costs or make an investment, you only lose the interest for the current month instead of the entire period. Some banks even offer you a fraction of the benefit for the days you’ve kept your money.
Most banks offer you the possibility to access your money market account from anywhere through a web portal or app. You can move money between accounts, make payments or transfer funds from the current account towards the money market account with a few clicks.
Low Risk
You can rest assured about your money if you place them in a money market account. The independent Federal Deposit Insurance Corp. insures each account up to the $250,000 limit per account. This means that such a financial instrument is a very low-risk and safe investment. Savvy investors often choose money market accounts because it protects them against loss of deposit.
If you invested the same amounts in the stock market, you would expose them to higher volatility. While this opens the door to potentially high gains, it is so speculative that you need to ask yourself twice if the risk makes this worthwhile.
Liquidity
Most start-up owners get new ideas often, and most of these ideas require some way of financing. Less fortunate situations like crisis or a loss in revenue could also trigger the ness to access these funds.
If you had stored them in a traditional savings account instead of a money market, you would incur additional losses, as there is sometimes a penalty for closing a deposit. Money invested in the stock market is also harder to access usually for at least a week, and there are also costs related to brokers. Needless to say that funds invested in real-estate are the hardest to access, as it can take months before you sell a property for the right price.
On the other hand, money stored in these accounts can be withdrawn at the nearest ATM, or you could even get the privilege to write a check if your bank has this service.
Possible downsides
Although these are handy tools, as a business owner it is wise to consider all aspects of a problem, including disadvantages.
Since you get the flexibility, the bank is at risk concerning the money available at its disposal. Therefore, there is a minim deposit and a minimum balance for these types of accounts. For example, the Bank of America set the amount to $2,500 while other banks require up to $5,000.
Next, to the minimum required amount, there is also the problem of a management and maintenance fee, which is usually withdrawn monthly from your account. This is a couple of dollars, but in a year it adds up to over a hundred.
Even if you get the opportunity to make withdrawals, since this is not a current account, you only get a limited number of such actions every month. The average number of permitted movements is around five or six. If you need more, perhaps you should consider a different product.
Last but not least, although you get a better rate than for a current account, the interest rate is variable. This fluctuates together with the general financial market, and it is heavily influenced by it. If you would prefer a stable and fixed interest rate, you have to opt for a classic savings account, usually for a more extended period, exceeding 36 months.
Final thoughts
As a start-up owner, you never keep all your eggs in one basket. One way to diversify the financial tools you use in your company is to store some of your reserves in a money market account. This should be the amount you would need in an emergency to pay salaries, suppliers or to fix something on the spot.
