Money market accounts have grown in vogue for personal savings, often replacing savings accounts as the place where savvy customers park their money. This isn’t terribly surprising, since money market accounts often carry significantly higher interest rates than savings accounts, while keeping risk very low. But while money market accounts have taken off in the consumer space, many business owners still don’t realize the advantages of money market accounts for small business.
The advantages of a money market account for a small business are much the same as they are for an individual, with some added bonuses. The biggest advantage of a money market account for a small business is the ability to earn interest on money that you might otherwise simply have sitting in a non-interest bearing checking account. You can even use it to hold a significant portion of your operating cash—that is, revenue that you have earmarked for operating expenses. This lets you put some of that operating cash to work generating income without having to risk it on less stable investments.
Because of the highly liquid nature of money market accounts, money can be withdrawn and deposited easily on an as-needed basis, compared to a CD which requires a minimum term before showing returns. Deposits in money market accounts are also FDIC insured and protected in case of bank failure. Due to federal regulations, only six total withdrawals are usually permitted to third parties, however, in person transactions such as transfers from your Money Market account to your Checking account, ATM withdrawals, and withdrawals directly to yourself generally do not count towards these limits.
One major drawback to a money market account for many new small business owners is the minimum balance required in order to avoid fees and penalties. Often, these accounts require a continuous minimum balance of between $1,000 and $25,000, depending on the bank. The limit on checks written to third parties also makes these accounts impractical for use as the primary account for a business. However, depositing revenue into a money market account and then moving it to your primary checking account in order to pay operating expenses is a great strategy for maximizing your small business profit. This is especially true for businesses that earn high revenues but have high expenses, and lets them squeeze out a slightly bigger profit margin than they otherwise might have.
The interest rates that are paid by money market accounts are, not surprisingly, tied to the money market. These rates are derived from the rate that banks charge each other for short term loans, and are fairly stable over time, making business money market accounts a good stable investment. This contrasts with placing money into mutual funds or investing it in the stock market, and while the returns are not as high, the risk is much much lower with a business money market account.
Getting a money market account is no more complicated than opening a checking or savings account. Because the account draws interest based on a standard interest rate benchmark, interest rates aren’t going to vary widely, however it always pays to shop around. You should also check with different banks to find a minimum balance amount that you feel comfortable with. If you are worried about meeting minimum balance amounts, you should also compare the fees that different banks charge for accounts below the minimum—these typically range between $5 and $20 a month.
Once you have found a bank that offers a money market account to your liking, opening the account itself will require a minimum deposit that varies by bank. You will also need all the paperwork that would be required to open a standard business checking account—typically, your Employer ID number or Tax ID, Articles of Incorporation or Articles of Organization, a photo ID, as well as a document that shows the names of all members or partners.