Over the past few years, small business owners have navigated a whirlwind of unpredictability. They've contended with supply chain disruptions, a global pandemic, economic volatility and a changing workforce. These challenges have underscored the importance of being ready for anything. As a result, establishing a business emergency fund separate from personal savings has become a higher priority for many business owners.
Meanwhile, amidst this backdrop of instability, there's a silver lining. Bank certificates of deposit (CDs) are experiencing a resurgence, emerging as a powerful savings tool with historically high rates. Small business owners can leverage these CDs to build up their emergency savings, providing a strategic financial cushion in the face of uncertainty.
"We haven't been in a high-CD-rate environment in quite some time, so this is an excellent opportunity to evaluate your business savings balances and decide if securing a CD makes sense," said Leasa Melton, manager of product strategy at BOK Financial®.
High inflation is good for CDs
A CD is a savings account with both a fixed rate and a fixed term. In exchange for your agreement to keep your money with the bank for a set period, the bank offers a higher interest rate—usually higher than a savings account or money market account. Still, for more than a decade, even CD interest rates were extremely low, but recent economic factors have pushed rates higher.
"It's been a long time since anybody has seen CD rates as high as they are now," said Edgar Zetina, consumer product manager at BOK Financial. "The increase is largely driven by the Federal Reserve’s rate increases over the past couple of years to combat inflation, and the plethora of high yield options in today’s rate environment.”
No-penalty opportunity for business owners
Even with the higher rates and shorter terms, business owners might balk at CDs because they usually require customers to lock away their money for a specific period. Melton, whose husband is a small business owner, relates. "Many business owners have to deal with unexpected expenses popping up, so keeping excess funds liquid can be extremely important."
For this reason, business owners might instead opt to put extra savings into a lower-paying savings account or money market account, forgoing higher rates for immediate access.
Recognizing this and hoping to incentivize more savings, some banks, including BOK Financial, offer no-penalty business CDs. Although these CDs typically offer a lower interest rate than with a traditional CD, it’s still generally higher than the rate you would get with a savings account.
"While traditional CDs have a penalty for withdrawing your money before the end of the term, no-penalty business CDs will allow you to pull out your money early without losing any of the premium or interest earned to date," explained Zetina.
Depending on their emergency fund size, business owners can split their savings between higher-yield, shorter-term traditional CDs and no-penalty CDs to capitalize on prevailing interest rates, he suggested. He also recommended for business owners to act quickly if they're interested in investing in a CD. Rates have plateaued and are expected to drop in 2024 as national inflation rates come under control.
"Whereas small business owners might normally avoid CDs as an investment for their extra savings because they need liquidity, now they can have the best of both worlds,” said Zetina.
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