MLR

Invest Excess Company Cash Wisely

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Business owners face a constant balancing act when it comes to deciding how much cash to keep in their regular checking accounts.

On one hand, the money in these accounts is available in case of an emergency or great business opportunity. But on the other hand, banks are prohibited by law from paying interest on regular business checking accounts.

Congress often discusses proposals to change the law, but in the meantime, you have to be creative to earn the highest rate of return on your company’s money.

The best approach: Calculate a monthly cash budget and a daily cash position that forecasts the extra cash you have available. Then, investigate options that enable you to earn interest, yet still have access to the funds when you need them. Below are three bank investment options.

1. Certificates of Deposit, or CDs, are normally single deposit investments that have maturity options that range from seven days to more than a year. They can pay a set or variable interest rate.

With CDs, you usually earn a higher interest rate than you get on other bank deposit investments. The reason is simple: The bank feels comfortable that the funds will stay in your account until the maturity date.

The drawback, of course, is that withdrawals from a CD before maturity generally result in a penalty. Therefore, look for advertised bank promotions that offer CDs with no early withdrawal penalty. In some cases, this no-penalty option can be exercised after a certain length of time — sometimes as brief as two weeks. In other cases, you can withdraw money at periodic dates throughout the life of the CD.

Another smart strategy is to stagger maturity dates on several CDs, rather than having one deposit make up a single CD. That way, you get access to your cash on a continuing basis.

In any event, keep in mind that interest rates may be negotiable, based on the strength of your banking relationship.

2. Money Market Accounts pay interest and give you some access to your funds. With these accounts, you can write checks and make deposits whenever additional funds become available. However, you can usually make only a limited number of withdrawals during a given period, say, three in a month.

Unfortunately, money market accounts aren’t designed to handle all of your checks or withdrawals. But with basic cash management, they can be an easy way to earn interest and have access to the funds on a limited basis.

3. “Sweep Accounts” are essentially checking accounts in which you give the bank permission to invest or “sweep” some money into an interest-bearing account on a day-to-day basis. These accounts aren’t always promoted by banks so you may have to ask if they are available.

Here’s an example of how they work: Let’s say your company routinely keeps large amounts of cash on deposit for short periods. With a sweep account, you instruct the bank to transfer any amounts in excess of, say, $25,000 into investments like overnight paper or repurchase agreements.

In essence, you transformed a no-interest account into one that pays you interest.

There are several variations on this theme. For instance, with a “reverse sweep account,” your company keeps almost no money in a regular checking account. When you write checks, the bank pays them with funds that are swept from an interest bearing account.

A word of caution: Sweep accounts may not be federally insured. This happens when your excess funds are swept from an insured bank or credit union account to an investment that is not covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). If the financial institution fails, you may lose some of your money. With a traditional account, federal insurance generally only covers the first $250,000 on deposit at each institution.