How Small Businesses Can Protect Cash Reserves

When a business saves money to handle unexpected expenses, the owners and managers need to think about how to keep their money safe, and how they can still use it. Knowing the options available from their bank, small businesses can ensure their cash is secure, available, and growing.

Protecting Cash Reserves

The U.S. Chamber of Commerce recommends businesses keep cash on hand to cover value-adding expenses. Cash ‘on hand’ means funds in bank accounts, money markets, or other assets that can be liquidated and funds accessed within less than 90 days.

How much should be accessible within 90 days? While we covered this topic more deeply in our recent blog “How Much Should a Business Save?”, cash reserves should cover at least three to six months’ expenses, according to the U.S. Chamber.

The dollar figure can vary greatly depending on the business stage. More mature businesses only take value-added expenses—such as staffing, equipment, or loan payments—of $83,400 per month to reach $250,000 in the business’s money market. Any larger than that and a portion of the cash reserves exceeds the FDIC deposit insurance maximum of $250,000. If a business wants to hold six months in reserve, expenses need only be $41,700 per month to create an uninsured balance.

Let’s look at how businesses ensure their money is FDIC-insured, even when they have more than $250,000 in their bank.

How to Expand FDIC Protection

First, a business’s FDIC coverage does not change by product; checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs), all receive the same $250,000 coverage. Even prepaid cards are FDIC insured when certain requirements are met.

What determines coverage levels is how the account is owned and at what bank it is placed.

Deposits held in different banks are separately insured. But what if a business owner or manager wants to deposit in one bank where they know the people or have one statement and one banking app?

When guided by their banker, owners or managers can first assess all their accounts to ensure they are owned in a way that maximizes insurance coverage. A wide range of FDIC ownership categories can give business account holders an additional $250,000 in FDIC insurance.

For small business cash reserves, owners should ask their banker about additional FDIC insurance through the bank provided by a network of banks. One such network is called IntraFi, which Coastal is a member of.

With IntraFi, the business deposits funds with Coastal. Other banks in the IntraFi network provide insurance beyond the first $250,000, allowing the business to earn a return and maintain access to the funds.

Normally, the business can make unlimited withdrawals from money market accounts or up to six per month from demand deposit accounts. Because owners and managers can choose one or both types of accounts, they can plan how they will keep reserves safe, available, and growing.

How FDIC Protection Works

Given recent banking history, with large banks closed by the FDIC a little over a year ago, small business leaders may wonder: What happens when I have full coverage and interest due, and a bank fails?

Consider this example for a CD: Deposit insurance would be calculated dollar-for-dollar, principal plus any interest accrued or due to the depositor, according to the FDIC. If a customer had a CD account with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured.

Want to double-check how much insurance you or your business have?

Many account holders don’t know it, but the FDIC provides a tool for this purpose called the Electronic Deposit Insurance Estimator. Whether you’re a business or a consumer, you can use the FDIC estimator to ensure you have the coverage you need.