When thinking about ways to handle your business finances, your primary focus may be in increasing your profits while reducing your losses. One way to help increase your business profits is to have a solid investment plan.
A great way to invest your company’s funds is in a corporate certificate of deposit.
What is a Certificate of Deposit (CD)?
A CD is a savings account that provides a higher rate of return than a standard savings account. Certificates of deposit also tend to be short-term, lasting between six and twenty four months, versus standard accounts which are ongoing. Depending on the type of CD you purchase, you cannot withdraw funds while the CD is active.
Types of CDs
The two major types of CDs are traditional and non-traditional.
Traditional CDs have a fixed interest rate and are active for a fixed period – six to twenty-four months. During this fixed period, the account is locked down and you cannot withdraw the funds without a substantial penalty until the CD matures.
Non-traditional CDs are usually custom-made by individual banks. These products can have variable interest rates and they are also active for a fixed period. During this fixed period, you might be able to withdraw the funds with minimal fees or penalties, depending on how that bank has designed the product.
How CDs Work
The following process works for traditional and non-traditional CDs:
You would first contact your financial institution to purchase a certificate of deposit. Most banks carry CDs, but if your current financial institution does not, you can shop around.
The amount you spend on the CD will be your initial deposit. For example, if you spend $2,500 on a CD, that will be the amount of your deposit.
The bank will hold the CD for the agreed-upon time period. During that time, the CD will earn interest on the principle amount. The amount of interest you earn will depend on the rate provided by the bank, or the going interest rates at the time you purchase the CD. Your best bet is to shop around for banks with the best CD rates.
At the end of the time period, you can withdraw the funds, roll them over into another account, or open another CD.
Why Open a CD?
Certificates of Deposit are great for situations where you need to save money and earn interest, but you don’t necessarily have the minimum deposit amount for other investment accounts. For example, you can purchase a CD for as little as $1,000, while an IRA could require a minimum deposit of $2,500.
CDs are also considered low-risk with good growth potential over other investment types. This is because CDs earn a fixed interest rate that is not affected by market fluctuations. To learn about CD growth and safety, contact your financial institution, or tap the endless bounty of online resources.
Things to Consider
- Make sure you understand all of the terms of the CD, such as how and when interest is accrued, and any strings or contingencies on the funds. For example, a bank may require that you have earned a certain amount in interest in order to cash out once the CD matures. If you are unsure about the terms of your CD, have your accountant or another financial professional review the documentation with you;
- Make sure the institution is FDIC insured. Some institutions are not, which means if the institution goes under, you could lose your investment. You can contact the FDIC directly to determine if your bank is insured;
- You should also make sure the actual CD is also FDIC insured. Although the institution is insured, some of their products might not be. Products that are insured should be labeled. If you are not sure, contact the bank directly and speak with a broker;
- Find out about any penalties or fees for early withdrawal. You might not need to exercise that option, but it’s better to know in advance just in case;
- Find out about renewal terms. The bank should automatically return your principle, and any interest, once the CD matures. However, some CDs might automatically renew on the maturity date. In some cases you might want to the CD to renew, so you can keep accruing interest. However, even if you do wish to renew, it helps to be aware of the renewal terms.
- CDs could be taxable. You need to be sure to include the interest earned at your end-of-the-year accounting.
About the Author: This article is written by Tara Miller