The economic environment is still not great for savers. Those who were smart or financially stable enough to have emergency funds and other savings accounts have been rewarded with low interest rates for the past few years. Take a look at these historical interest rates to see how low we’ve come. The good news is that inflation is low, as well, but that doesn’t stop expenses from going up every year, with our savings unable to keep up with the changes.
Recently, a friend of mine asked for my advice. I suppose he reads Consumerism Commentary occasionally and thought that my opinion might help, or I’d be able to uncover a magical savings account. He wrote:
Back in 2008, probably on your recommendation, I opened a Business Savings Account with ING Direct because, at the time, the interest rate was 4%. As of March of last year, it has dropped to a dismal 0.95% APY and now I’ve got $26,000 basically doing nothing. Any suggestions for what to do with it? I’d like to keep it somewhat liquid as it is, technically, emergency backup money. But it doesn’t need to be too liquid because I haven’t withdrawn any money from it in two years. First Choice Bank, who I just signed up with for my line of credit, has a 1.25% APY money market account. I haven’t asked him about anything else, yet.
The first question is whether a savings account or something equally as liquid is appropriate for his situation. Emergency funds should mostly consist of money in savings accounts, but the credit line could help in emergency situations as well. Even though he hasn’t withdrawn money from the emergency fund for his business in the past two years, there is still the possibility of an emergency in the future, particularly if his business is already having some financial difficulty. A good portion of business expenses should remain liquid to be able to cover those times when clients may not be spending as freely with his company as they used to.
Money market accounts are, from a regulatory standpoint, savings accounts with a fancier name. They may offer some more features, like check access, but non-ATM, non-teller withdrawals are limited to six a month, just like savings accounts. A business certificate of deposit might provide a slightly better rate in return for the slight decrease in liquidity; most of the time, you have to lose some of that interest when you withdraw your funds from a CD before its maturity date, but that makes this a good choice to squeeze a little more out of an emergency fund, money there’s a good chance you won’t withdraw anyway.
I looked into business accounts interest rates. Most of the big banks have a variety of business products, and they usually don’t list rates on their websites. I called around to the major national banks to ask about their business savings account rates, and they were all well below ING Direct’s rate. (Ed. note: ING Direct became Capital One 360 in 2013.) Even CD rates were lower. I walked into Wells Fargo (formerly Wachovia), where I hold some of my own business banking accounts, to hear what they had to offer. The representative mentioned that this is the reason they don’t have current interest rates on their website; the low rates would scare customers away.
My friend is on the right path. Small banks and credit unions will be able to offer much more favorable rates on savings products. His best bet is to call the brick and mortar banks local to his business and ask around for the best rates in business checking and savings accounts.
My banking set up includes the basic business checking and money market account at Wells Fargo, as I mentioned, plus a business savings account at ING Direct. The accounts at Wells Fargo are free as long as I maintain a minimum balance in the money market account, and the account at ING Direct is always free. When I opened the Wells Fargo business account a few years ago, they offered a promotional interest rate on par with ING’s standard rate, but that offer has long since vanished. I have nothing to complain about when it comes to either Wells Fargo or ING Direct, and I would recommend them, but in terms of interest rate, a small bank or credit union could offer better plans.
What are your suggestions for business banking products?