Checking vs Savings Account: What Do You Need for Your Small Business?
Should you have a checking vs. savings account? Many entrepreneurs have problems determining what type of bank account to open for their business.
Both types of accounts have pros and cons and serve different purposes. While businesses should typically have both, it’s important to understand the differences between these types of accounts and how they can benefit your small business.
Let’s take an in-depth look at each one.
|Table of contents|
|1. The difference between checking and savings|
|2. Checking accounts: in-depth|
|3. Savings accounts: in-depth|
|4. Which is better?|
|5. Additional tips|
|6. One unexpected benefit of bank accounts|
|7. Frequently asked questions|
The Difference Between Checking And Savings Accounts
The primary difference between checking and savings accounts comes down to what you plan to do with your money.
Checking accounts are typically considered transactional accounts. This means that you plan to make frequent deposits and withdrawals.
They allow you to easily access and spend your money as you see fit via debit cards, ATM withdrawals, and mobile payment apps.
#DidYouKnow While checking offers convenience and accessibility, they typically have more fees than savings accounts and don’t pay interest to account holders.
On the other hand, you should have a savings account if you want to make long-term investments. This is because they make spending harder by limiting the number of transfers you can make per month.
However, unlike most checking accounts, they allow you to earn interest on your money over time.
#DidYouKnow While savings accounts don’t allow you to quickly access and spend your money, they are great for storing cash as generous interest rates help you build up your savings over time.
Checking vs. Savings Accounts: at a Glance
|Checking Accounts||Savings Accounts|
|Main Uses||Daily spending||Long-term saving|
|Withdrawal Limits||None||6 per month|
|Interest Earned (APY)||0%||0.15% – 2.5%|
|Monthly Fees||$0 (Depending on the bank)||$0 (Depending on the bank)|
|Other Fees||Overdraft, ATM, Minimum Balance, Maintenance, and More||Usually, no additional fees|
|Deposit Requirements||$0 – $100 (Depending on the bank)||$0 – $25,000 (Depending on the bank)|
|Other Features||Online Deposits, Checks, ATM Fee Reimbursement, FDIC Insurance, Online & Mobile Banking||Online Deposits, FDIC Insurance, Online & Mobile Banking|
What Is A Business Checking Account?
A business checking account allows you to make withdrawals and deposits, write checks, make payments, and get a debit card to get cash from an ATM or make everyday purchases.
They are products most commonly offered by banks and credit unions.
Compared to a personal account, it takes more paperwork to sign up for a business checking account, and there are often fees associated with them.
Some financial institutions will waive monthly fees for these business accounts that carry a minimum balance or have a minimum number of direct deposits or transactions each month.
With the added fees and paperwork required to open this type of account, some people may think there is no need to get a separate one for the business.
However, there are advantages to getting a business checking account, including:
- liability protection
- streamlining information for accounting and tax purposes
- legitimacy when conducting business with others
Types Of Checking Accounts
There are several different checking accounts, including:
- Business: Dedicated solely to companies, they are for business purposes only
- Traditional: Personal accounts for individuals
- Premium: Include additional perks such as free checks, no fees, safe deposit box, in addition to carrying a higher balance
- Student: For people between 18 and 23 years old traditionally, helping students get started
- Senior: For people 55 and older, it comes with perks
- Interest-bearing: Operates like a checking account but earns interest in return for having a high balance or other things
- Checkless: Operates just like a traditional, but without offering paper checks
- Rewards: Gives perks such as cashback bonuses for debit card transactions
How To Choose A Checking Account
First, make sure that the financial institution you choose offers FDIC or NCUA insurance of at least $250,000 for each depositor.
You should also check the requirements for carrying a minimum balance and what the fees are should you not meet the minimum requirement.
Along those lines, check to see what other fees (if any) there are, like an overdraft fee. Consider whether the account offers any special perks (like overdraft protection) or if it pays interest, and what the ATM network is like.
Finally, consider the features of mobile banking.
Does A Business Checking Account Pay Interest?
An increasing number of accounts will pay interest nowadays, thanks to all the competition in the financial marketplace.
The national average interest rate for business checking accounts sits at around 0.03%.
Alternatives To Checking Accounts
If you’re looking for an alternative, your choices could include:
- Money market account
- Prepaid debit card
- Credit card (unsecured or secured)
- Brokerage account
- High-yield savings account
Checking Accounts Pros And Cons
These accounts are great for daily spending as they provide easy access to your funds as you need them.
- Easy access
- Debit Cards
- Online & mobile banking
- More fees
- Usually, don’t pay interest
What Is A Business Savings Account?
A business savings account is a bank account set up to help businesses grow their money through interest and other returns.
Most of the time, you set up these accounts at a financial institution, but there are online fintechs that also have the product.
These accounts don’t offer the best returns, like some investment accounts do, but they do offer availability and liquidity.
You can use them in conjunction with a business checking account
Types Of Savings Accounts
There are many different savings accounts, including:
- Business: Offered for businesses to stash away emergency funds
- Traditional/Personal: Given to individuals who want their money to grow
- Online: Operate without a retail presence, with all transactions conducted online
- High-yield: Offer interest rates higher than traditional, with a higher balance required usually
- Student: Meant for those between 18 and 23 who are just starting their savings journey
- Certificates of Deposit (CDs): Pays a higher yield, but you can’t touch your money for a set term, during which you must pay a fee to withdraw capital
- IRAs: Retirement accounts with tax benefits meant for long-term savings
- Health Savings Account (HSA): Specific accounts for saving for medical expenses that also have tax benefits
How To Choose A Savings Account
First, how will you use the account and the money in it?
If you plan to make multiple transactions a month, keep in mind that these accounts might not be the best option for you, as there are limits to six withdrawals each month from them, per federal regulations.
Next, decide what the most crucial aspect of the account is to you.
- If it’s the ability to connect to a checking account, make sure you open it at the same financial institution.
- If it’s mobile banking, make sure the bank is technologically advanced.
Always check to see what fees the financial institution charges. This could include monthly fees just for having the account, which the bank could waive depending on the monthly balance.
Finally, always try to get the best interest rate you can. While interest rates aren’t high today on traditional savings accounts, you can increase how much you make on these accounts by shopping around for the best rates.
Does A Business Savings Account Pay Interest?
Almost all savings accounts pay interest. After all, their goal is to make your money grow—even if it’s not at a fast pace.
The national average interest rate for savings accounts sits at around 0.06%.
Alternatives To Savings Accounts
If you’re looking for an alternative, your choices could include:
- Money market account
- Treasury or Bond
Savings Accounts Pros And Cons
On the other hand, Savings accounts are perfect for long-term savings due to a generous annual percentage yield and low fees.
- High-interest rates
- Few fees
- Online and mobile banking
- Transfer and withdrawal limits
- Less convenient for spending
Checking vs. Savings Account: Which Is Better?
After comparing checking and savings accounts, which one is the better option for your small business?
Generally speaking, a business checking account is more useful.
That’s because a checking account gives the business the freedom to use it however they want to. This could include paying anything from supplies to company meals or other business-related expenses.
But they don’t usually offer interest earnings.
On the other hand, savings accounts often limit businesses to six withdrawals per month, including any payments out of the account.
But they are the best way to earn interest on your business profits. So this can be a great way to save up money for your next big business venture.
#CaminoTip Search for business checking accounts that pay interest to get the best of both worlds.
In short, checking accounts are better for everyday transactions, while savings accounts are for storing money and accumulating interest.
You Should Have Both Types Of Accounts
Having both a business checking and savings accounts makes it easier to:
- Maintain accounting records
- File small business taxes
- Get approved for a small business loan
- Separate your business finances from your personal finances
- Build your business credit score
Additionally, if the hassle of maintaining two business accounts worries you, mobile banking makes it incredibly easy to manage both accounts.
If you are serious about properly managing your small business finances, consider opening both a checking and savings account.
Here are a few extra tips to help you maintain your small business’s checking and savings accounts.
1. Open Both Accounts At The Same Bank
Open both accounts at the same bank. This will make them much easier to manage as you will be able to access both accounts through your bank’s website and mobile app.
By opening both accounts at the same bank, you will be able to easily check balances, manage both accounts, and make transfers between them.
2. Open Both Accounts Online
Nowadays, you don’t have to go to a bank in person to open or manage your accounts. Instead, you can and should open both of your accounts online.
Opening your accounts online is much easier and faster than doing so in person and will help you familiarize yourself with online banking.
3. Have Different Bank Accounts For Business And Personal Finances
Commingling is when you use the same account for business and personal purposes, and is a practice you should avoid at all costs.
Be sure to open separate accounts for your business and personal finances.
Having separate accounts for your business will make it easier to manage your finances, help build your business credit score, and make it much easier to file taxes at the end of the year.
This is particularly important if you want to apply for a small business loan. Your lender will need to review your business finances to approve your application, which is much easier if your business account is separate from your personal account.
One Unexpected Benefit Of Bank Accounts
From making it easier to manage your finances to simplifying your taxes, business accounts offer many great benefits for entrepreneurs.
One great benefit you might not have known about is that business accounts make it easier to apply for small business loans.
Because having one allows lenders to check that you have a strong enough cash flow to repay the debt.
By having an account at a bank or credit union, you make their jobs easier and improve your chances of receiving approval.
At Camino Financial, we want to see you succeed.
We offer small business loans with friendly terms to help small business owners like you pursue new business initiatives and build their road to success. We also provide educational resources (much like this article) to help you grow your business.
If you want to receive tips, tricks, and ways to strengthen your business, subscribe to our newsletter.
Are interest rates fixed on savings and checking accounts?
No. Interest rates on savings and checking accounts are variable.
The financial institution bases them on the prime rate set by the federal government.
Most savings and checking accounts will have roughly the same interest rate, which can either increase or decrease depending on several factors.
Could I lose my money in a checking or savings account if the bank fails?
As long as it’s an insured bank (look for the phrase “member FDIC”), you won’t lose your money if the bank fails.
Those insurances cover you up to $250,000 per depositor. It gives you peace of mind that your money is safe.
Is money safer in a checking or savings account?
Both types of accounts are equally safe if the bank is FDIC insured.
Should I have both accounts at the same bank?
Not necessarily. There used to be a time when this was necessary if you wanted to quickly move money back and forth between the two accounts. But, it is very easy to do this nowadays, from online savings accounts to checking accounts and vice versa.
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