It goes without saying that the existence of savings accounts initially focused around the individual person due to a surplus in cash for future expenses. However, it is often oblivious to the layperson that businesses also do have savings. Naturally, financial institutions have honed down on this opportunity and started offering savings accounts purposely for the commercial enterprise.
Although the operations of a business savings account works very similarly to the personal savings account, there are some significant differences. You’ll find below a summary of how a business savings account works along with all the information needed before you start applying for one.
What is a business savings account?
A business savings account works as a way for commercial enterprises to save excess money with the benefit of earning interest on those savings. Considering that the excess money is not required for the day-to-day business operations, the idle money that isn’t making business profit could be put to better use in a business savings account. For money that is being used for the day-to-day business operations, a business chequing account would be more appropriate.
As with a personal savings account, a business savings account is able to earn a small interest percentage from the account balance. Generally, interest rates are comparable to a personal savings account. For example, a TD’s Every Day Savings Account offers a 0.25% interest rate for balances between $0 to $4,999.99 and a 0.35% interest rate for balances between $5,000 to $9,999.99. Their Business Savings Account offers 0.10% for balances between $0 to $9,999.99. Although this may be viewed as not a lot, it certainly is better than not receiving any interest at all!
What is the differences between a personal savings account and a business savings account?
Despite the similarities a personal savings account and a business savings account may share, there are quite some significant differences. For example, a business savings account may attract charge fees that will not be found in a personal savings account. Due to the purpose of a business savings account to hold cash that is not required on an everyday basis, banking providers normally charge a fee for every deposit made into the business savings account. Additional fees may also be incurred for cash and coin deposits as opposed to cheque deposits.
Another critical difference is that a business savings account may be made accessible to several different employees of a company. Authorization can be given to these employees which is great for a business’ ability to micromanage. Personal savings account do not offer this ability to allow several different persons to access the account unless the account is a joint account.
Is a business savings account insured?
A business savings account offered by a financial institution is insured by the CIDC and is covered for a maximum of $100,000 as long as the denomination is in Canadian dollars. For business savings accounts offered by credit unions, a provincial insurance plan is often responsible for any loss.
It is important to bear in mind that in the event you are a sole proprietor of your business, the CDIC will only offer no more than $100,000 of insurance for all personal accounts (even if the account’s primary purpose is for your business). It is therefore more attractive for a sole proprietor to incorporate their business and get a business savings account separate from their own personal savings. In such an event, both your personal savings account and your business savings account attract a $100,000 insurance each with a combined total of no more than $200,000.
Why should you open a business savings account?
In the event your business has dormant cash that isn’t being used as working capital for the business operations, a business savings account will help turn that dormant cash into a profit machine through interest rate returns. This type of investment is extremely attractive due to its very low-risk nature (only risk you bear would be the insolvency of the financial institution which is highly unlikely). Further, deposits made to a business savings account is insured by the CIDC which means that you are covered for up to $100,000.
What do you need to open a business savings account?
In order to open a business savings account, you will need to produce evidence of your company’s existence. Although further requirements may vary from one financial institution to another, the articles of incorporation, a business licence and financial statements are often included in the general requirements.
Can a business open a personal savings account?
An incorporated business is not allowed to open a personal savings account and is only allowed to open a business savings account. Sole proprietors on the other hand are not confined to this rule and are allowed to open personal savings accounts should they choose to.
What alternatives are there to opening a business savings account?
The purchase of guaranteed investment certificates and bonds, or the placing of a business’ savings into a short-term money market fund are alternatives to opening a business savings account. However, it is crucial to note that only government investment certificates are insured by the CDIC with the catch of being potentially subjected to a lost interest penalty if you redeem the GIC before its term is up.