How Does FDIC Insurance Work for Business?

FDIC insurance exists to protect your business from a worst-case financial scenario – the failure of the bank you’ve entrusted with your company funds. When this happens, the bank suddenly can’t uphold its obligations and business cash is at risk.

Like other forms of insurance, FDIC protection is vital to avoiding catastrophic losses. To make the most of this government protection, you should first understand its details and limitations.

What is covered by FDIC insurance?

Let’s start with the basics. The Federal Deposit Insurance Corporation [FDIC] is an independent agency of the federal government that protects funds deposited by individuals or businesses at a member bank. Since the program was established in 1933, no depositor has lost a penny of FDIC-insured funds.

FDIC coverage protects up to $250,000 per account owner / ownership category at each member bank. It covers several types of accounts including checking, savings, money market, and certificates of deposit [CDs]. That means, if your business deposits up to $250,000 in a covered account at an 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 at member banks is automatic in most cases.

With FDIC insurance, the bank foots the bill, paying all the necessary premiums without directly passing the cost on to you. 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 the amount covered by FDIC insurance. In January 1934, the FDIC covered deposits up to $2,500. By 1939, that amount doubled to $5,000.

Fast forward about 40 years, and the FDIC had increased its maximum insured deposits to $100,000. Then, with the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2008, the limit was raised once again to its current level of $250,000.

Big Banks Provide the Same Protection as Small Banks

With the anxiety of the last financial crisis and the recent bank failures 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.” For those of us with parents or grandparents who experienced the Great Depression, we know their stories of bank closures and lost fortunes all too well.

Since the early 20^th century, much has changed in the protection of your company funds. Now, funds deposited in any FDIC member bank receive the same protection – regardless of the bank’s size. 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 institution.

Why Insure Business Deposits?

While rare, bank failures still happen. In fact, from 2001-2021, 561 banks became insolvent and collapsed. Then in 2023, three of the four largest bank failures in U.S. history occurred.

Most commonly, bank failures are seen in times of economic upheaval like the Great Depression, the Savings and Loan Crisis of the 1980s and 1990s, and the Great Recession. In 2008 alone, 25 banks with over $373 billion in assets failed. FDIC insured cash deposits were safe from these bank failures, but in most cases, only up to the limit at the time of their failure.

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 covered bank fails. When the FDIC steps in, its first order of business is to try to sell deposits and loans from the failed institution. If a sale occurs, your account is simply transferred to the new institution and your money stays secure.

If the FDIC can’t sell 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 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.

Large cash reserves can create extra risk for businesses.

Cash reserves enable businesses to weather emergencies and economic downturns. However, significant cash on hand comes with its own complications. If the bank holding your cash fails, uninsured deposits – those above the $250,000 FDIC limit – could be lost. That’s why achieving full FDIC insurance should be a top priority for businesses with large cash holdings.

As previously mentioned, your business can receive up to $250,000 in FDIC protection at an insured bank, but what if your business has more than this limit? One option to overcome the $250k limit is to open accounts at many different banks. After all, the FDIC limit is restricted to $250k per owner, per account ownership category, at each insured bank.

If your business has $5 million in reserve cash, you could establish relationships with at least 20 banks to achieve full FDIC protection. However, this strategy is difficult to manage. Your business would need the resources to manage all 20 relationships, along with the work of balancing and reconciling all those accounts. Add the work of achieving a competitive interest rate for cash reserves and it might take an entire team to manage your company’s cash.

Fintech has made extended FDIC protection available to all businesses.

In the past decade, the emergence of advanced financial technology – commonly shortened to fintech –  has disrupted traditional business cash management. One of the most innovative ways this technology has helped businesses is by simplifying the process of managing business deposits.

Our company, the American Deposit Management Co [ADM], has leveraged proprietary fintech to revolutionize the process of achieving FDIC coverage far beyond the traditional limits for business cash. We call this concept Marketplace Banking™.

Earn More, Risk Less with Marketplace Banking™ by ADM

With Marketplace Banking™ by ADM, your business can access FDIC protection for all its cash*. This concept leverages our fintech to spread your business cash among our network of banks who compete for deposits. This process happens automatically with our American Money Market Account™ – or AMMA™ for short. Once cash is deposited into an AMMA™, your business gets the benefits of multiple banking relationships – 100% FDIC coverage* and nationally competitive rates – without the hassle.

To get started, complete our simple application. Then an ADM team member will assist you in making your first deposit.

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 LinkedIn, Twitter and Facebook.

*Funds in an AMMA™ can be deposited with traditional banks or Credit Unions. When funds are deposited at a credit union, NCUA insurance will be available in lieu of FDIC insurance and is functionally equivalent.

BACK