Is your company seeking a cash investment that pays higher interest rates than a checking account without sacrificing FDIC insurance? You’ve probably considered savings and money market accounts – both are great options. However, if you need higher returns with the same government protection, consider adding a Certificate of Deposit [CD] strategy to your cash management program.
How CDs Work
While CDs often pay higher interest rates than deposit accounts, there are important considerations. To reap the benefits of a CD, you need to invest your cash for a set period of time.
CDs Have Set Terms
A CD holds a fixed amount of your company’s money for a predetermined timeframe – e.g. six, twelve, twenty-four, or even sixty months. The length of time you allow the bank to hold the money is called the term of the CD. Typically, banks pay a higher rate for a longer term because the bank has more time and flexibility in how they utilize the invested cash.
CDs Have Set Interest Rates
Interest rates for CDs are generally fixed. That means you will know the rate that you will receive for the entire length of the CD term before you invest. This feature can be particularly important when market interest rates are declining. If rates for new CDs fall during your CD term, it doesn’t impact the CD’s return.
CDs Have Early Withdrawal Penalties
If you need to access the money in a CD before the end of the term, you will typically owe an early withdrawal penalty. The early withdrawal penalty for a CD depends on the length of the CD term and is often between 3- and 12-months’ interest.
CDs are FDIC Insured
CDs issued by FDIC member banks are insured up to the $250k limit per account ownership category at each financial institution. However, business cash reserves often vastly exceed this limit. Fortunately, fintech has made it possible to access extended government insurance.
CD Strategies Can Enhance a Cash Management Program
CDs can benefit your cash management plan in a variety of ways. These strategies can help you optimize the results from CD investments.
Buy and Hold
One common CD strategy is to buy a single CD with a term and interest rate that matches your needs and then hold it to the end of the CD term – also known as the CD’s maturity. At maturity, you have several options. These include:
- choosing not to re-invest. You can choose to have the CD proceeds transferred to a checking, savings, or money market account. This could happen automatically, depending on the criteria you agreed to when purchasing the CD.
- automatic reinvestment. Depending on the terms of the CD, the funds could be automatically reinvested in another CD with the same term at maturity. However, with automatic reinvestment you are not guaranteed the same interest rate on the new CD. Instead, the new rate would be based on current rates.
- manual reinvestment at a new term. You can also choose to invest your funds in a longer- or shorter-term CD. To do this, you would need to let your bank know before the CD matures. Like with automatic reinvestment, the rates on new CDs will be based on the bank’s current offerings.
To determine how to proceed when a CD matures, consider current rates and when the funds will be needed. If the bank’s current interest rates don’t meet your needs, partner with a deposit management company that offers nationally competitive rates from a vast network of banks and credit unions.
Replacement At a Higher Yield
When interest rates are rising rapidly, it can make sense to reinvest CD funds prior to maturity. As the Fed funds rate rises, the rates that banks pay tend to follow. This can mean that CD rates are far higher than they were when your company purchased a CD.
For example, from February 2022 to February 2023, average CD rates rose nearly 5x. In many cases, businesses that purchased CDs in 2022 or earlier benefitted from cashing out those CDs and reinvesting in a new CD at higher rates – even after early withdrawal penalties were considered. This case study provides a detailed example of how one company more than doubled their interest income after early withdrawal fees.
The rates that banks pay for similar accounts vary widely based on geography, bank structure, and bank needs. No matter what is happening with monetary policy, it can make sense to reinvest CD funds if you can earn more interest, net of early withdrawal penalties. The right deposit management partner can make this process simple.
A CD ladder is an investment strategy that involves buying multiple CDs with varying terms. When you implement a CD ladder, funds mature at set dates according to your schedule. This strategy can be beneficial if your company needs to spend funds on a predictable schedule, such as for a construction project that will take several years to complete. A CD ladder can also be useful if you want frequent opportunities to reinvest CD proceeds at new rates. This can be particularly helpful when you believe interest rates will rise during the term of the CD.
Locating Advantageous CDs
To get started investing in CDs, it’s natural to begin with your preferred bank. However, a local bank may not have the term, interest rate, or laddering strategy you need. If you want to optimize your CD strategy, look to a fintech powered deposit management partner.
Optimize Your Company’s CDs with ADM
At the American Deposit Management Co. [ADM], we help businesses optimize their cash reserves through our proprietary fintech. We have curated a nationwide network of financial institutions that compete for deposits. When you invest with us, you receive nationally competitive interest rates from the banks and credit unions in our network.
In addition to competitive returns, our fintech allows us to spread business cash across our network so that every penny is insured by the FDIC or NCUA. With ADM, you receive all of this and reduce your company’s workload. We locate and manage your CD investments so that you don’t have to. All you need to do is fill out a simple application and make a single deposit. Our experienced cash consultants take it from there.
To learn more about ADM, or get started today, contact us.