CD vs. Savings Account for Small-Business Cash (with Beancount examples)
Deciding where to park your small business's cash reserves can feel like a balancing act between earning a decent return and keeping funds accessible. The two most common, safest options are high-yield savings accounts and certificates of deposit (CDs). Each serves a distinct purpose, and choosing the right one depends on your timeline and liquidity needs.
Let's break down the differences, explore the nuances of FDIC insurance for businesses, and then dive into practical Beancount patterns to track it all cleanly.
TL;DR: The Quick Summary
- Savings / Money Market Deposit Accounts (MMDAs): Best for liquid, everyday operating cash and near-term tax payments. Their interest rates are variable. While the Fed removed old withdrawal limits, banks can still set their own rules.
- Certificates of Deposit (CDs): Offer a higher, fixed yield if you can lock up cash for a specific term. Pulling money out early triggers a penalty.
- Safety First: Both are FDIC-insured up to $250,000 per depositor, per bank, per ownership category. The rules differ slightly for sole proprietorships versus corporations.
- Over the Limit?: For balances above $250,000, services like an Insured Cash Sweep (ICS) can spread your funds across multiple banks to maximize insurance coverage while you maintain a single banking relationship.
- Beancount Users: Skip to the end for journal patterns to model CDs, accrue interest, and handle early withdrawal penalties correctly.
What Each Account Does Well 🏦
High-Yield Savings / Money Market Deposit Accounts (MMDAs)
Think of these as your business's primary cash hub. They are designed for safety and accessibility.
- Liquidity: This is their main advantage. You can withdraw funds anytime without penalty. It's important to note that even though the Federal Reserve removed the old "six convenient withdrawals per month" rule (Regulation D) in 2020, individual banks are still free to impose their own transaction limits or fees. Always read your account's terms.
- Insurance & Safety: Savings and MMDAs at an FDIC-insured bank are covered. Don't confuse these with money market mutual funds offered by brokerages, which are investments and are not FDIC-insured.
- Best Use Case: Perfect for your operating cash buffer (3-6 months of expenses), funds set aside for near-term payroll or taxes, and your general emergency reserve.
Certificates of Deposit (CDs)
CDs are a deal you strike with the bank: you agree not to touch your money for a set term (e.g., 3, 6, 12 months), and in return, the bank gives you a higher, fixed interest rate.
- Yield Certainty: The fixed rate is a key benefit, protecting you if market rates fall. The flip side is the penalty for early withdrawal. If you break a CD within the first six days, federal rules mandate a minimum penalty of seven days' simple interest. After that, the penalty is determined by the bank's own policy (e.g., three months of interest).
- Insurance & Safety: CDs carry the same FDIC insurance as savings accounts, up to the same $250,000 limit.
- Best Use Case: Ideal for cash you are certain you won't need for the duration of the term. This could be money earmarked for a tax payment nine months away or a reserve for a capital expenditure you plan to make next year. CD laddering—opening multiple CDs with staggered maturity dates (e.g., 3, 6, 9, and 12 months)—is a popular strategy to balance higher yields with regular access to cash.
FDIC Coverage: The Practical Bits for Businesses 🛡️
The FDIC insurance rules are straightforward but have important distinctions for different business structures.
- The Headline Rule: You get $250,000 of coverage per depositor, per insured bank, per ownership category. All your deposits (checking, savings, MMDAs, CDs) within the same ownership category at a single bank are added together to determine your coverage.
- Sole Proprietorships: Business accounts for a sole prop are treated as the owner's individual accounts. They are combined with the owner's other personal single accounts at that same bank for one $250,000 insurance limit.
- Corporations, LLCs & Partnerships: These legal entities are insured separately from their owners' personal accounts. The business itself gets its own $250,000 of coverage per bank.
- Need More Coverage?: If your business holds more than $250,000, you don't have to juggle multiple banking relationships. Ask your bank about an Insured Cash Sweep (ICS). This service automatically distributes your deposits across a network of other FDIC-insured institutions, keeping all your funds insured while you manage them through your primary bank.
When a Small Business Should Favor Each Option 🤔
-
Choose a Savings/MMDA when…
- Your cash flow is unpredictable or you have frequent, variable expenses.
- You're building your 3–6 month operating expense buffer.
- You need immediate access to funds and are willing to accept a variable interest rate.
-
Choose a CD when…
- You have a surplus of cash that you can confidently lock away for a fixed term.
- You want to lock in a specific interest rate and protect your return from market fluctuations.
- You are building a CD ladder to create a predictable schedule of maturing cash.
A blended approach is often best: keep your immediate operating cash in a high-yield savings account and place longer-term reserves into a CD ladder or short-term Treasuries.
Important Fine Print to Read 📝
- Early Withdrawal Penalties: These are specific to each bank and will be disclosed in your CD agreement. The best way to avoid them is to plan your ladder carefully so you don't have to break a CD.
- Transaction Limits on Savings: Just because the federal rule is gone doesn't mean your bank won't charge you a fee after a certain number of monthly withdrawals. Check your account agreement.
- Taxes on Interest: Interest earned from both savings and CDs is generally taxable income in the year it's credited to your account. You'll receive a Form 1099-INT. If you pay an early withdrawal penalty, it is deductible. The penalty amount appears in Box 2 of your 1099-INT and is typically treated as a business expense.
Alternatives Worth Knowing
- Treasury Bills (T-Bills): These are short-term loans to the U.S. government that mature in 4 to 52 weeks. They are considered one of the safest investments in the world, backed by the full faith and credit of the U.S. government (not FDIC insurance). They are highly liquid and can be a great option for cash reserves exceeding FDIC limits.
- Money Market Mutual Funds (MMFs): Offered by brokerage firms, these are investment products, not bank deposits, and are not FDIC-insured. They invest in high-quality, short-term debt and aim to keep a stable value of $1 per share, but this is not guaranteed.
A Decision Cheat-Sheet ✅
| If you... | Then choose a... |
|---|---|
| Need funds at any time and want no term risk? | Savings/MMDA |
| Have a known future date for a cash need and want a better fixed rate? | CD (or a CD ladder) |
| Are holding over $250k at one bank? | Multiple banks or an Insured Cash Sweep (ICS) service |
| Want a government-backed, liquid, short-term yield? | T-Bills in a brokerage account |
Beancount: How to Model Savings and CDs 💻
For those of us managing our business finances with plain-text accounting, here are some simple, effective patterns for tracking these accounts in Beancount.
1) Chart of Accounts
First, ensure you have the necessary accounts. Adjust the names to fit your own chart.
Assets:Bank:Checking
Assets:Bank:Savings
Assets:Bank:CD:12M ; Create a unique account for each CD
Assets:InterestReceivable ; Optional, for monthly accruals
Income:Interest:Bank
Expenses:Bank:EarlyWithdrawalPenalty
Documents:Bank ; To link statements and agreements
2) Open and Fund a CD
When you open a CD, it's a simple transfer from one asset account to another.
; Open a 12-month CD for $50,000
2025-01-15 * "Open 12M CD @ fixed rate"
Assets:Bank:CD:12M 50,000.00 USD
Assets:Bank:Checking -50,000.00 USD
document: "Documents:Bank/CD-Agreement-2025-01-15.pdf"
3) Recognize Interest: Two Methods
Option A: Recognize Interest Only When Paid (Simple)
If your bank credits all interest at maturity, this is the easiest method.
; CD matures; principal + interest paid to checking
2026-01-15 * "CD matured; interest credited"
Assets:Bank:Checking 52,375.00 USD
Assets:Bank:CD:12M -50,000.00 USD
Income:Interest:Bank -2,375.00 USD
Option B: Accrue Interest Monthly (Better for Reporting)
For more accurate monthly financial statements, you can accrue the interest earned each month.
; Monthly accrual (illustrative amount)
2025-02-15 * "Accrue CD interest"
Assets:InterestReceivable 197.40 USD
Income:Interest:Bank -197.40 USD
; At maturity, reverse the receivable when the cash arrives
2026-01-15 * "CD matured; settle accrued interest"
Assets:Bank:Checking 52,375.00 USD
Assets:Bank:CD:12M -50,000.00 USD
Assets:InterestReceivable -2,372.80 USD
Income:Interest:Bank -2.20 USD ; true-up for rounding
4) Early Withdrawal and Penalty
Recording a penalty requires an extra posting to an expense account. This keeps your reporting clean and makes tax time easier.
; Break CD early; bank pays back principal plus net interest after penalty
2025-06-10 * "Early CD redemption; penalty applied"
Assets:Bank:Checking 50,900.00 USD
Assets:Bank:CD:12M -50,000.00 USD
Income:Interest:Bank -1,200.00 USD
Expenses:Bank:EarlyWithdrawalPenalty 300.00 USD
document: "Documents:Bank/1099-INT-2025.pdf" ; Box 2 shows the penalty
5) High-Yield Savings Interest and Reconciliation
Recording interest from a savings account is straightforward. Use a balance assertion to confirm your books match the bank statement.
; Monthly interest posted to savings
2025-03-31 * "Monthly interest - Savings"
Assets:Bank:Savings 185.23 USD
Income:Interest:Bank -185.23 USD
; Reconcile with the month-end statement
2025-03-31 balance Assets:Bank:Savings 150,185.23 USD
Tip: Always attach digital copies of your statements and CD agreements using the
document:metadata tag. At tax time, you can easily search forExpenses:Bank:EarlyWithdrawalPenaltyand verify the amount against Box 2 of your 1099-INT.
Final Thoughts: A Simple Cash Policy
- Segment Your Cash: Keep your runway plus 1–2 months of operating expenses in a liquid Savings/MMDA. Place reserves for the next 3–12 months in a CD ladder or T-Bills.
- Mind Your Insurance: Keep balances for each legal entity under the $250k limit per bank, or use an ICS service.
- Avoid Surprises: Read the fine print on withdrawal rules and CD penalties before you commit your cash.
- Stay Tax-Aware: Remember that interest is taxable and early-withdrawal penalties are deductible. Consult with your CPA to ensure you're handling them correctly.
This article is for educational purposes and does not constitute financial or tax advice. Please consult with a qualified professional for guidance specific to your business.
