7 Reasons Your Business Needs a Business Savings Account

7 Reasons Your Business Needs a Business Savings Account

7 Reasons Your Business Needs a Business Savings Account

Your business is making money and you’re paying the bills. At what point do you need to think about the next step and open a business savings account?

Here are seven signs it’s time to open a business savings account.

1. You want to be prepared for emergencies.

It’s inevitable that some crisis will occur in your business, whether it’s a customer who suddenly starts paying late,  or the city decides to tear up the sidewalk in front of your business, or you lose a key employee and sales slip while you search for a replacement. The median and small business only has about 27 days’ worth of cash in reserve available to pay bills without additional revenues coming in (“cash buffer days”) according to research by the J.P. Morgan Chase Institute.

That’s not a large cushion. The sooner you start setting aside money for whatever crisis (or opportunity) comes your way, the more confident you’ll feel when something does go wrong.

2. You want to budget for periodic expenses.

Taxes (and tax preparation fees), insurance premiums, holiday gifts or bonuses, and a variety of other expenses come up just once or twice a year. Instead of getting stressed out when you have to write that big check, consider a different approach. Break the amount up into monthly payments, and then transfer that amount into a savings account each month. Paying them when they come due will magically become stress-free. Your financial institution may even make it easy for you to set up a separate savings account just for periodic expenses.

3. You want to earn more interest.

Many checking accounts don’t earn interest, or if they do with the amount is miniscule. Savings accounts may allow you to earn a little bit more interest on your savings. (Take heart: with interest rates rising, interest on savings accounts will go up too.) Just be sure you understand  fees that may be charged if your balances dip below a certain amount.

4. You don’t want to pay for overdrafts.

Chances are, your financial institution will offer you an overdraft line of credit. It’s convenient and can protect you from bouncing checks or dealing with the embarrassment of a payment that is denied due to non-sufficient funds (NSFs).  But overdraft lines of credit aren’t free. You may be charged a fee for each transfer, and interest will accrue on the balance due, often at a fairly high rate.

If you can swing it, you may want to set up your own overdraft account by stashing money in savings and linking it to your checking account to cover any overdrafts. If there isn’t enough money to pay an expense from your checking account, the money will be transferred from your savings. Tip: set up online alerts so if a crook somehow accesses your checking account you can quickly report the fraud.

5. You want to keep your money safe.

Eligible business savings accounts are protected by FDIC insurance up to $250,000. (Note that to be eligible, the business must be organized under state law. Savings accounts held by sole proprietorships are included under personal FDIC insurance limits.) Similarly, credit union savings accounts are insured by the NCUSIF.

6. You want a financially healthy business.

Cash flow is an important indicator of business financial health. In addition to having strong business credit, a healthy balance in business bank accounts can be a sign of financial health. You’ll be better able to plan for future growth with confidence.

 7. You want to be as creditworthy as possible.

You may find when you apply for small business financing that some lenders want to review bank statements, or even directly connect to your bank account information in order to verify your revenues and expenses. A healthy balance in a savings account will make your business more attractive to some lenders, and could even be the difference between getting approved or having your application rejected.

Whether you decide to open up a savings account now or wait until later, you should have a business bank account of some type in order to separate business activity from your personal accounts. Having a savings account with a growing balance provides peace of mind that can helps you navigate the ups and downs of entrepreneurship.

This article was originally written on October 30, 2018.

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