Common Business Cash Investments That Are Excluded from FDIC Insurance

Business cash reserves provide vital insulation from cyclical changes, and these funds can even make the difference between growth and insolvency during bouts of economic stress. However, financial institutions are not immune to economic turmoil, which means companies must take precautions to ensure that their cash remains safe and accessible when they need it.

The Federal Deposit Insurance Corporation [FDIC] provides the most robust protection available for business cash, but coverage is limited to certain account types at member financial institutions. Some other investment alternatives are entitled to similar protection, while others have no government backing at all.

By understanding how each type of investment is insured or backed, cash managers can accurately predict the risk associated with a particular investment before purchasing. This knowledge enables them to make wise decisions that keep their cash safe during periods of economic stress.

Why does FDIC insurance matter?

Two main factors threaten the safety of business cash – principal loss due to market changes and the risk of losses from financial institution failure. Fortunately, the FDIC protects depositors from both risks.

FDIC insurance automatically applies to deposit accounts opened at a member bank – including checking, savings, money market deposit accounts, and Certificates of Deposit. Coverage protects principal and accrued interest in these accounts up to $250,000.

The FDIC is an independent federal agency and is backed by the full faith and credit of the U.S. government. The agency facilitates the transfer of covered funds or reimburses deposits from its own reserves in the event of a bank failure. This insurance is so effective that the FDIC proudly shares that no depositor has lost a penny of insured funds since the agency was established following the Great Depression.

Stocks, Corporate Bonds, and Municipal Bonds Are Risky Choices for Business Cash

Equities are a particularly risky investment for businesses since their value is not guaranteed. If the issuer of the stock goes bankrupt, shareholders are often left with nothing.

Corporate and municipal bonds also subject businesses to significant risk because their only backing is the entity that issued the debt. If the company or jurisdiction that issued the debt fails, bondholders could receive some of their money back during bankruptcy proceedings, but the long-run average recovery rate is only 40%.

While stocks and bonds offer a low probability of recovering cash in the event of issuer failure, investors do receive some protection from SIPC. This organization is a non-profit membership corporation that seeks to return up to $500,000 of securities to investors if the broker-dealer holding them fails.

Unlike the FDIC, SIPC is not a government agency and is not backed by the U.S. government. Additionally, SIPC coverage does not guarantee the value of the securities returned to investors.

Treasuries Are Not FDIC Insured, But Are Backed Directly by the Federal Government

Treasury securities are a popular tool that cash managers often employ to earn additional interest on funds that are not needed in the short term. These debt instruments are issued by the federal government, not banks, and are therefore not covered by FDIC insurance.

While Treasuries are not backed by the FDIC, they are directly guaranteed by the full faith and credit of the U.S. government – making their safety as unquestionable as an FDIC-insured deposit account. This government guarantee ensures that bondholders receive the interest they are owed throughout the term of the investment and that their full principal is returned at maturity.

In today’s world, Treasuries are issued electronically and are typically held by a broker-dealer on behalf of a business. Fortunately, these investments are also covered by SIPC, which seeks to return securities to their rightful owners in the event of broker-dealer failure. The combination of direct government backing for the bonds and SIPC coverage for the storage of the securities makes Treasuries extremely safe investments for companies who plan to hold them to maturity.

Credit Union Deposits Are Backed by the NCUA

Credit union deposits are not covered by the FDIC, but they are protected by the National Credit Union Administration [NCUA]. The NCUA is an independent federal agency that oversees member financial institutions and provides insurance for deposits.

NCUA insurance offers the same level of protection as the FDIC since both agencies are backed by the full faith and credit of the U.S. government. It also covers the same types of accounts as FDIC insurance, though they often go by different names at credit unions. These include share draft accounts, share savings accounts, and share certificates – known as checking accounts, savings accounts, and Certificates of Deposit at banks.

How should a company invest to maximize safety for cash reserves?

Businesses seeking government backing for their cash have a few options. They could invest in Treasuries directly backed by the government, an account covered by a government agency, or work with a deposit management company to access extended insurance.

To find an FDIC member bank, cash managers can use the BankFind tool. Then, they can compare account options and interest rates from several banks to find the right fit.

However, a company that invests directly with an FDIC insured bank or NCUA insured credit union must contend with the issue of insurance limitations. The company could manually spread cash across multiple financial institutions to take advantage of combined coverage, but this process is time consuming and difficult to manage. Fortunately, modern innovation has created a simpler solution – a partnership with a deposit management company.

Access to Full Government Protection with Deposit Management From ADM

At American Deposit Management, we make it simple for companies to secure access to full government protection for all their cash. Our modern deposit management solutions spread an organization’s cash across our nationwide network of financial institutions to achieve protection for any sum – even for funds that vastly exceed the FDIC or NCUA limit.

In addition to access to the ultimate safety for cash through our patent-pending technology, we offer nationally competitive interest rates from the financial institutions in our network. Best of all, we accomplish all of this with one account and a single, consolidated monthly statement.

To learn more about how we protect business cash and get started today, contact a member of our team.

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