Business Savings Accounts

We know that individuals save money for upcoming expenses, projects, down payments, etc. but they aren’t the only ones who have surplus cash in their budgets. Businesses also have savings, so it’s natural that financial institutions would offer savings accounts specifically for commercial enterprises. While business savings accounts tend to operate much like personal savings accounts, there are some differences. Here’s a quick look at how business savings accounts work, and what you need to know about them before you apply for one.

What is a business savings account?

A business savings account is a savings vehicle for commercial enterprises. It allows a business to earn interest on money that is not needed for day-to-day use (for these requirements, a business chequing account is a more appropriate option).

Similar to personal savings accounts, you can earn a small amount of interest on the balance of your account. Interest rates are usually comparable to those for personal savings accounts. For example, TD’s Every Day Savings Account offers 0.25% for balances of between $0 - $4,999.99 and 0.35% for $5,000 - $9,999.99, while their Business Savings Account offers 0.10% for $0 - $9,999.99. It’s not a lot, but it’s better than nothing!

What are the differences between personal and business savings accounts?

While they are very similar, there are some differences between personal and business savings accounts. First, business savings accounts charge fees that you may not find in a personal savings account. Because their purpose is to hold money that isn’t needed on a daily basis, business savings accounts typically charge a fee for each individual deposit made into the account, as well as a separate fee for cash and coin deposits (versus cheque).

Another key difference is that, with a business savings account, many different people at a company can be authorized to make transactions; this can be a lifesaver, if you usually rely on just one person to do all the banking and they are away. The multiple user feature is usually not provided at the individual account level, unless you have a joint account with a partner or spouse.

Are business savings accounts insured?

Yes, savings accounts held by businesses are insured by CDIC. Should the bank fail, a business savings account is covered up to a maximum of $100,000 (so long as it is denominated in Canadian dollars). Business savings accounts at credit unions will be insured by a provincial insurance plan, instead.

One thing to keep in mind, if you are a sole proprietor, is that CDIC will only offer up to $100,000 of insurance for all your personal accounts – even if the primary purpose of one is your business. This is one reason why sole proprietors might want to consider incorporating their business and getting a business savings account that is separate from their personal savings. In this case, both your personal and business accounts would offer $100,000 of insurance each for a combined maximum total of $200,000.

Why open a business savings account?

If your business has cash that is not required for working capital (operations) or capital expenditures, you have the option to park some money in a business savings account. Over time, the balance of the account will grow due to interest – typically calculated on a daily basis. And the bonus: it’s a risk-free investment. Deposits in business savings accounts are insured by CDIC, so you would never lose the principal.

Many companies also save money for large purchases they plan to make in the future. For example, if you are a manufacturer, you probably have a plan for when your equipment will need to be replaced and how much it will cost. If you’d rather not take out a line of credit to finance the purchase, you could instead set aside after-tax earnings until the business has saved enough to buy the equipment.

Your business could also be saving money for an upturn in the economy, when it may make more sense to expand.

What is needed to open a business savings account?

To open a business savings account, you need to provide proof of a company’s existence. Each financial institution will have its own required documents, which will often include: articles of incorporation, your business licence and financial statements.

Can a business open a personal savings account?

No, an incorporated business cannot open a personal savings account – it must open a business savings account. However, sole proprietorships are not restricted by this rule, and may open a personal savings account instead.

Alternatives to opening a business savings account

If you own a business that has savings to invest, a savings account is not your only option to do so. You can also purchase guaranteed investment certificates, bonds, or place the savings in short-term money market funds. Of this list, only GICs are CDIC-insured, but you could be subjected to a lost interest penalty if you redeem before the term of the GIC is up.