How Does FDIC Insurance Work for Business?

A bank vault containing cash and gold. This is meant to indicate that FDIC protection is the ultimate protection for business cash deposits.

FDIC insurance exists to protect you and your business from a worst-case financial scenario: The bank you’ve entrusted with your company funds fails, and suddenly it can’t make good on its obligations to you and your business. Like all insurance, FDIC insurance is protection you know you need, but less well-known are the details about how FDIC insurance works. Further, why do businesses need FDIC coverage?

What’s covered by FDIC insurance?

Let’s start with the basics. The Federal Deposit Insurance Corporation is an independent agency of the federal government that protects funds deposited by individuals or businesses at a member bank.

FDIC coverage protects up to $250,000 per account owner / ownership category at each member bank, and it can cover several different kinds of accounts such as checking, savings, money market and certificates of deposit. That means, if your business deposits up to $250,000 in a covered account at FDIC-insured bank, those funds are safe even if the bank fails.

Who pays for FDIC insurance?

FDIC insurance is different from other types of coverage where the individual or business pays a fee to an insurer for protection. That’s because FDIC protection is automatic in many cases.

With FDIC insurance, the bank foots the bill, paying all the necessary premiums without directly passing the cost on to you. And since the inception of the FDIC, depositors at member banks have enjoyed the ultimate protection for their cash, up to the established limit.

How has the FDIC evolved over time?

Perhaps the most striking evolution is in the amount covered by FDIC insurance. In January 1934, the FDIC covered depositors up to $2,500. By 1939, that amount doubled to $5,000.

Fast forward 80 years, and the FDIC had increased its maximum insured deposit to $100,000. Then, with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the limit was raised once again, to its current max of $250,000.

Big Banks Provide the Same Protection as Small Banks

With the fear and anxiety of the last financial crisis and the recent pandemic still fresh in our minds, it’s tempting to be leery of banks. As we saw in the case of Bear Stearns and Lehman Brothers, there is no such thing as “too big to fail.” And for those of us who grew up with Depression-era parents and grandparents, we know the stories of bank closures and lost fortunes all too well.

But much has changed since then, especially in recent years, to ensure your company deposits are protected — guaranteed, in fact — by the U.S. government. The responsibility of protecting these funds lies with the FDIC, regardless of the size of the bank. So, it doesn’t matter if you utilize a small local bank or a huge national chain, your covered funds are equally safe in any FDIC member bank.

Large sums of reserve cash can create extra risk for businesses.

Maintaining an appropriate cash reserve provides businesses with confidence that they will endure the next emergency or economic downturn. But keeping a large pile of cash on hand comes with its own complications.

Once a business decides to increase its level of reserve cash, there are several issues that must be considered. The most important of those issues is protecting that cash. A business can keep up to $250,000 in cash protected in a FDIC insured bank account, but what if your business has more than this limit?

To overcome the $250k limit, businesses have options. They could open accounts at as many different banks as they would need to achieve the FDIC coverage. After all, the FDIC limit is restricted to $250k per owner per account ownership category, per insured bank. So, if the business has $5 million in reserve cash, they will need relationships with at least 20 banks to achieve full FDIC protection.

The business would then need the resources to manage all 20 relationships, along with the work of balancing and reconciling of those accounts. If the business had $50 million in cash, imagine the work that would be involved to achieve FDIC protection for the entire amount.

If a bank fails, how does the FDIC protect business deposits?

Although the FDIC is a government-affiliated agency, it is not our tax dollars that immediately come to the rescue when a bank covered by deposit insurance fails. Instead, when the FDIC steps in, its first order of business is to try to sell deposits and loans from the failed institution to a solvent one. If a sale occurs, your account is simply transferred to the new institution and your money stays secure.

If the FDIC can’t sell off the assets of the failed institution, it will tap into its own pool of funds. Again, these funds are built from premiums paid by banks, not your tax dollars. These funds will be utilized to reimburse affected customers, up to the insured balances of their deposits. This usually happens within a few days of the bank’s closing.

Fintech has made extended FDIC protection available to all businesses.

In the past decade, the emergence of fintech has led to the disruption of business cash management. Our company, the American Deposit Management Co [ADM], has leveraged our proprietary fintech to revolutionize the process of achieving FDIC coverage far beyond the traditional limits for business cash.

With a Marketplace Banking™ account by ADM, your business can begin the process of achieving FDIC protection for all its cash in just a few minutes. This account utilizes our proprietary fintech to spread your cash among our network of community banks who compete for your deposits. So, not only can you achieve protection for all your cash, but you also get the most competitive return available.

The benefits of Marketplace Banking™ by ADM do not stop there. ADM makes the process of achieving 100% FDIC coverage very simple. To get started, simply complete a 10-minute application. Then an ADM team member will assist you in making your first deposit. After that, you get a single consolidated statement each month, and you can monitor your deposits 24 / 7 using our secure online portal.

Benefits of Extended FDIC Protection with Marketplace Banking™

If your business has achieved FDIC protection for all its cash, you can rest assured that it is as safe as possible. FDIC protection is backed by the full faith and credit of the U.S. Government, so there is no stronger protection available for your cash. If your bank fails, no problem. Per the FDIC, “since 1933, no depositor has lost a penny of FDIC-insured funds.”

In addition to that protection, with a Marketplace Banking™ account by ADM, hundreds of banks will be competing for your deposits. So, your business will have access to the most competitive rates available. This means the days of researching rates to find the best place for your cash are over.

Finally, ADM makes managing your reserve cash simple. With a Marketplace Banking™ account, your business won’t need a team of professionals to manage multiple banking relationships. We take that work off your hands. And, when you need your cash fast, ADM can provide next business day liquidity.

Earn More, Risk Less with Marketplace Banking™ by ADM

There are other options available in the marketplace that provide access to extended FDIC coverage, such as CDARS and ICS. But those programs come with important limitations that are not an issue with a Marketplace Banking™ account.

If you need the MOST FDIC protection available for your business deposits, don’t hesitate to contact a member of our teamOur team is our secret sauce, and we’ll get your business on the road to efficient cash management with the MOST protection and the MOST competitive return available. If you’re looking for more valuable insights on banking, interest rates, and effectively managing your business cash, be sure to check out our Insights page and follow us on LinkedInTwitter and Facebook.