Business checking accounts have traditionally been used for basic banking needs such as making deposits and writing checks. They have not been known to be interest-bearing accounts. However, with changes in banking technology and priorities, more options are emerging for small business owners to earn interest on their checking account balances.
In the past, most traditional, brick-and-mortar banks did not pay interest on business checking accounts. Interest earnings were reserved for savings accounts, certificates of deposit, and other bank products aimed at consumer savings. Business checking was purely for transactions. However, online banks and financial technology companies have disrupted this model by offering business checking accounts with much higher interest earnings than previously available.
High-yield business checking accounts are a relatively new offering that allows businesses to earn interest on their checking account balances. The "high-yield" designation means that these accounts pay a higher annual percentage yield (APY) interest rate versus standard business checking accounts. Many purely online banks and banking platforms now offer business checking accounts with APYs over 1%.
By comparison, many traditional bank business checking accounts either do not pay interest at all, or they pay a very minimal percentage yield, often less than .1%.
If you use Meow to apply for a checking account from FirstBank, a Tennessee corporation; Member FDIC, you'll receive up 5.02% APY (subject to rate sheets, as of 1/23/24. Meow is a financial technology company, not a bank).
The higher interest rates offered by some online banking options provide more incentive for businesses to park cash they need for regular operating expenses in their checking accounts versus a separate savings account or other bank product. High-yield business checking accounts essentially allow small businesses to earn passive income on the money they need access to for monthly transactions and bills.
To earn the high-yield APYs advertised by banks and online platforms, business checking accounts often come with certain conditions. The most common requirements are:
In addition to requirements, most high-yield business checking accounts also place limits on how much money can actually earn the advertised APY. The caps prevent businesses from just shuffling excess cash into their checking accounts.
For example, an account may pay a 3% APY, but only on balances up to $100k or $250k. Any amount over that cap would earn little to no interest. Many high-yield business checking accounts have caps in the $100k-$500k range. So you can benefit from the high interest rates, but only up to a point.
Some banks offer uncapped business checking accounts, which pay high rates on million-dollar-plus balances with no limit. However, the qualifications may be tougher for these accounts.
Another thing to keep in mind with business checking accounts that bear interest - the earnings are taxable. Any bank will issue you a 1099-INT form at year-end documenting the interest paid to you. Even if you reinvested the monthly interest earned back into your account all year, you must still pay taxes on it. Interest income flows through to your business income tax return.
So be sure to discuss with your accountant to understand the implications for your particular business's tax situation. You don't want to get caught off guard with a higher-than-expected tax payment due to interest income from your bank accounts.
Assuming your business can qualify for a high-yielding account and tolerate the tax implications, the benefits can be significant:
While interest-bearing business checking accounts offer tempting yields these days, they are not equivalent to investment returns. And they may not match the rates or accessibility provided by some other bank account types:
These savings accounts pay interest using tiered rates based on your balance - the higher the balance, the higher the interest rate. However, business savings accounts limit monthly withdrawals and charge heavy fees for exceeding them. So accessibility is restricted.
Also known as CDs, these are locked, fixed-term accounts, ranging from 3 months to 5+ years. You agree not to touch your principal for the entire term in exchange for earning a higher guaranteed interest rate. CDs often pay better rates than even high-yield checking, but are much less liquid. Early withdrawals incur stiff penalties.
You can increase liquidity by "laddering" CDs, spreading money across accounts of varying terms. This staggers maturity dates so some become available regularly while still earning high rates. It requires large upfront deposits though and carries early withdrawal fees if you absolutely need the money.
MMAs earn interest like savings accounts and allow check writing/debits like checking accounts, but with the latter having limits per month.
Credit unions may pay higher deposit rates than banks. However, membership eligibility and access to branches are more restrictive versus purely online options.
With all the options now available to earn interest on checking account funds, how do you choose what works best? Here are key considerations:
Do you need to run high volumes of payments and transfers in and out daily? Can you keep volumes lower? Transaction volume requirements may factor into eligibility for some high-yield accounts.
Do you need instant liquid access at any given moment to all the cash in the account? Or is locking up portions for fixed periods in CDs a possibility? Less liquid options may be able to earn more interest.
Are you maximizing interest earnings above all else? Or do you need at least a minimum baseline yield while keeping funds accessible regardless? This governs whether you need the highest-yield account possible or one that guarantees a good rate despite lower balances or activity.
It is admittedly far more complicated for small businesses to earn interest on operating cash balances than just a few years ago! But with smart research and planning, you can now generate substantial passive income on the money sitting in your business checking accounts. Just be sure to understand all the requirements, rate caps, and tax implications before you dive into one of these high-yield accounts.
Click the button below to apply for a business checking account from FirstBank, a Tennessee corporation; Member FDIC. The application generally takes less than 10 minutes to complete.
If you already have a business checking account and you are exploring alternatives, take a look at the following article: Making the Switch: Changing Business Bank Accounts
To learn more about the key benefits of business checking accounts, check out the following article: Key Benefits of a Business Checking Account