Is your company looking for better interest rate options that are still FDIC / NCUA insured? Usually, companies use savings or money market accounts–both are great options. But if you’re in the market for something that pays a little more, maybe your company should consider certificates of deposit (CDs).
CDs typically pay higher interest rates, but that rate comes with a concession. To use a CD, you need to lock your money in for a set period of time.
How CDs work
A CD is basically a savings account. It holds a fixed amount of your company’s money for a set time period – like six, twelve, twenty-four, or sixty months. In other words, it’s a time deposit.
Because you’re willing to allow the bank to use your money for a set period of time, they reward you with higher interest rates. They can afford to pay you more, because they know you can’t walk in the bank tomorrow and take your money.
The length of time you agree to allow the bank to hold your money is called the term. And, yes, the bank normally pays a higher rate for a longer term. But before assuming that a longer term CD is best, think through when your company will be needing that money.
If you need the money before the term is up, you will have to pay an early withdrawal penalty. That penalty could whittle away interest you earned, and it may even affect your initial deposit.
When your term is complete, the CD will “mature.” The bank will notify you near the end of the term, and you will have several options. If you do nothing, the money will most likely be reinvested in another CD for the same term.
This doesn’t necessarily mean the interest rate will stay the same. It may be higher or lower. You are not guaranteed the same rate. For that reason, it’s best to review the CD and not just let it rollover on its own.
When the CD matures, you may decide to reinvest in a longer or shorter term CD, and you will need to let your bank know before the renewal deadline.
You can also choose to transfer the money to your checking, savings or money market account.
Basic CD strategies
- When you start looking into CDs, check with your bank. They can explain their CD options.
- Ask lots of questions. Ask out about early withdrawal penalties. Get educated about types of CDs.
- Learn about ladder strategies for your company. This involves buying different CDs with varying terms. Essentially you are determining what money your company will need and when, so you have money available at regular intervals and don’t have it all locked up at one time.
- Look for flexibility with your CDs. A degree of flexibility comes with the type of CD you choose. And there are plenty of CD options available.
To sum it all up, here are the main takeaways you need to remember about CDs.
- CDs are a good place to put money for a short period of time.
- CDs keep your deposits safe, and are expected to have a higher rate than traditional MoneyMarket accounts.
- You will have to pay penalties if you withdraw the money early.
If you determine that certificates of deposit are a good fit for your organization’s financial strategy, ADM can help ensure you get the highest interest rates and the best banks for your needs.
Let ADM help you choose the right CD. Talk with one of our friendly associates today.
Pritchard, Justin. “Learn How Certificates of Deposit (CDs) Work.” The Balance. June 11, 2018.
Armstrong, Tony. “What is a CD (Certificate of Deposit)?” Nerdwallet. October 3, 2017.
“What is a Certificate of Deposit?” Wall Street Journal.