A business term deposit is a type of savings product offered by financial institutions where a company deposits a lump sum of money for a set period to receive a guaranteed interest rate. The interest rates are typically higher than standard business savings accounts, which is why they’re preferred by businesses looking to maximise their return on investment over a predetermined timeframe. (1)
Here’s what industry experts shared about the financial upsides of business term deposits.
What are the Benefits of Business Term Deposits?
Finance expert NerdWallet explains the benefits of term deposits for businesses aiming to manage surplus funds. For one, the predictability of guaranteed returns from fixed business term deposit rates helps companies accurately plan their financial future. (2)
A blog post from Investopedia described two types of interest rates commonly quoted in term or time deposits. The first is the monthly percentage interest derived from the funds. The second is the annual percentage yield, which is the investor’s earnings if the monthly interest is left to compound in the account. Depending on the interest payment frequency chosen by the account owner, there’s a potential to earn more from compounding interest. (3)
The Australian Government’s Financial Claims Scheme lessens the risk involved in this type of investment. Term deposits of up to $250,000 per account holder per institution are covered, thereby enhancing financial security without sacrificing growth potential. With competitive interest rates greater than standard savings accounts, the investor can expect more returns for less risk. (4)
Various term lengths offer flexibility, ranging from 30 days to over a year. Investors can choose how frequently they receive interest payments, whether monthly, quarterly, annually, or at maturity. Furthermore, businesses save money because term deposits generally don’t charge account fees.
Term deposits generally do not require any upkeep, which is ideal for those looking to add a passive source of income to their portfolio. Overall, the combination of convenience, low risk, and guaranteed high returns make this form of investment an attractive option to many companies.
What Businesses Must Consider Before Opening a Term Deposit Account
Forbes Advisor shared some of the top considerations before opening a business term deposit account. One is the minimum investment requirement. Businesses must determine if they can meet the initial deposit threshold.
Meanwhile, business term deposits come with various terms, so investors must assess how long they can lock away their funds without access. Early withdrawals often come with penalties that can impact overall returns.
Interest rates and payment frequency are also critical factors when choosing a term deposit. Interest rates differ based on the term length and the amount invested, so businesses should research current rates for maximum returns. Additionally, understanding how often interest is paid affects cash flow planning.
Once funds are deposited, account owners have restricted access to their money. Most term deposits do not allow early withdrawals without penalties. This limitation can be critical if a business needs liquidity during the term. Therefore, the benefits anticipated from the term deposit must outweigh the potential need for funds to avoid financial strain.
Finally, fees and charges associated with the account can impact profitability. Some banks may impose maintenance fees, which businesses should confirm before committing. (5)
Evaluating these considerations helps companies ensure that the account supports their financial goals and operational needs, ultimately maximizing the benefits while minimizing potential drawbacks.
What to Do After a Business Term Deposit Matures
According to Moneysmart, term deposit accounts must be reviewed at least a month before maturity. It’s customary for banks to call the account owner to discuss the performance of their investment and their options moving forward. This is the time for the owner to assess their financial goals and decide what to do with the initial investment and any earnings accumulated.
One option is to reinvest in another term deposit that aligns with one’s needs. Others may also opt to put the funds and any accumulated earnings back into the business to use or invest in other ways. Comparing interest rates from different financial institutions and exploring investment alternatives can help investors choose the most favourable option.
Meanwhile, Moneysmart warns investors about automatic renewal traps by specifying their preference to their financial institution before the maturity date. If the funds automatically roll over to a new term deposit, they will be restricted from access again, with possibly lower interest rates than when they were initially invested. (6)
Ultimately, a business term deposit can be a powerful vehicle for businesses looking to grow their savings without taking significant risks. However, understanding the terms and choosing the right deposit product for one’s business’s financial goals is crucial. By considering business term deposit rates, planning for the set period, and selecting a financial institution with a history of competitive offerings, businesses can leverage this option to secure a higher rate and achieve steady financial growth.
References:
1. “Term Deposit: Definition, How It’s Used, Rates, and How to Invest,” Source: https://www.investopedia.com/terms/t/termdeposit.asp
2. “Term Deposits: What They Are and How They Work,” Source: https://www.nerdwallet.com/ca/banking/term-deposits-how-they-work#:~:text=Term%20deposits%20are%20low%2Drisk,a%20set%20amount%20of%20time.
3. “Time Deposit (aka Term Deposit) Definition and How Does It Work?'” Source: https://www.investopedia.com/terms/t/timedeposit.asp
4. “About the Financial Claims Scheme,” Source: https://www.apra.gov.au/about-financial-claims-scheme
5. “Our Pick Of The Best Term Deposits In Australia,” Source: https://www.forbes.com/advisor/au/savings/best-term-deposits-australia/
6. “Term deposits,” Source: https://moneysmart.gov.au/saving/term-deposits