Top 6 Ways to Earn Interest on Cash Reserves (Plus the Pros and Cons of Each)

Investment Option	Interest Rate	Liquidity	Risk Level	Tax Advantages
High-yield deposit account	Moderate	High	Low	None
High-yield savings account	Moderate	Moderate	Low	None
Money market account	Moderate	Moderate	Low	None
Short-term Treasury bills	Low	High	Very Low	Federal tax-exempt
Certificates of deposit	Moderate	Low	Low	None
Municipal bonds	Low to Moderate	Moderate	Low to Moderate	Federal tax-exempt, possibly state and local tax-exempt

Please note that any references made in this article to federal government insurance coverage up to a certain level (typically $250,000 per account owner per account type) are contingent upon the funds being placed in institutions insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). Only deposits in FDIC-insured banks or NCUA-insured credit unions are protected under this coverage.

Looking for insights about earning interest on your business’s cash reserves? You came to the right place. We can help you make informed decisions for your business. We’ll compare six popular interest-earning options, from high-yield deposit accounts to municipal bonds, and explore the pros and cons of each. Find out how your money can work for you!

Any of the following accounts can appeal to businesses wanting to earn interest on their cash reserves. Of course, it’s important to consider the pros and cons specific to your needs before jumping in. Read on to learn more about:

• High-yield deposit accounts (HYDAs)
• High-yield savings accounts (HYSAs)
• Money market accounts (MMAs)
• Short-term Treasury bills (T-bills)
• Certificates of deposit (CDs)
• Municipal bonds

High-Yield Deposit Accounts and High-Yield Savings Accounts

For businesses HYDAs and HYSAs are excellent high-interest, easy-access options offered by some fintechs, banks, and credit unions. There are many similarities between these two types of accounts, so we’ll discuss them together.

HYDAs accounts earn higher interest rates than traditional business deposit accounts, meaning businesses can make more money on their cash reserves. Some HYDAs include checks and debit cards to move funds around, while others exclusively feature online or in-app transfers.

Like a HYDA, HYSAs offer a higher-than-average annual percentage yield (APY*). However, they are designed to hold funds for extended periods and usually include lower caps on the number of transactions allowed per month. Fewer transactions enable your financial institution to offer higher interest rates. 

Both accounts are typically backed by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance up to a certain limit (usually $250,000 per account type per account owner, information that will apply to all mentions of FDIC or NCUA insurance in this article). These accounts are great for businesses wanting to maximize cash reserves while keeping funds liquid. 

The pros and cons of HYDAs and HYSAs:

Pros:

1. Higher interest rates: HYDAs and HYSAs outshine traditional savings accounts with higher interest rates, helping businesses reap more rewards on excess idle cash reserves.
2. Liquidity: HYDAs and HYSAs ensure hassle-free access to your money, proving invaluable for managing cash flow, addressing unforeseen expenses, and capitalizing on promising business ventures.
3. FDIC or NCUA insured: HYDAs and HYSAs are generally guaranteed by the FDIC or NCUA, safeguarding your business’s funds. 
4. Low or no fees: Many institutions offer low or no monthly maintenance fees, trimming your costs and boosting your returns on cash reserves. 
5. Encourages efficient cash management: Higher interest rates offered for HYDAs and HYSAs can motivate businesses to keep more of their cash reserves in these accounts, improving cash management.

Cons:

1. Variable interest rates: Interest rates on HYDAs and HYSAs can fluctuate based on market conditions and a financial institution’s policies, potentially impacting returns on your cash reserves.
2. Minimum balance requirements: Some HYDAs or HYSAs may require a minimum balance to open the account or maintain a certain balance to earn higher interest rates.
3. Transaction limitations: Some accounts may restrict the number of withdrawals or transfers allowed per month, which could be an issue for businesses that need frequent access to their funds.
4. Interest rate caps: Some institutions may have caps on the interest rate businesses can earn on HYDAs or HYSAs, limiting potential returns.
5. Alternative investment opportunities: While HYDAs and HYSAs offer higher rates than traditional accounts, other investment options, such as stocks, bonds, or mutual funds, may provide better returns.

Money Market Accounts

Money market accounts (MMAs) are flexible interest-earning accounts offered by fintechs, banks, and credit unions, seamlessly merging the features of savings and business accounts. They give businesses a great opportunity to earn interest on excess cash reserves while maintaining liquidity.

The pros and cons of MMAs:

Pros:

1. Tiered interest rates: Some MMAs feature enticing tiered interest rates, offering higher returns for larger account balances and motivating businesses to maintain more robust cash reserves in these accounts.
2. Liquidity: MMAs provide a reassuring level of liquidity, making it easy to manage cash flow, tackle unexpected expenses, or take action on new business opportunities.
3. Check-writing and debit card privileges: MMAs often come with limited check-writing and debit card transactions, granting more adaptability than traditional savings accounts—though there might be some caps on monthly transactions.
4. FDIC or NCUA insured: MMAs are generally secured by FDIC or NCUA insurance. 

Cons:

1. Minimum balance requirements: Some MMAs may require a minimum balance to open the account, avoid fees, or secure the most attractive interest rates.
2. Transaction limitations: MMAs are subject to federal regulations that limit the number of certain types of transactions, such as withdrawals and transfers, to six per month. Exceeding these limits can result in fees or account closure.
3. Fees: Some MMAs charge monthly maintenance fees, which can offset the interest earned on the account. You can compensate for these fees by maintaining a minimum balance or meeting other conditions, ensuring your interest earnings remain intact.
4. Lower rates compared to high-yield options: While MMAs offer higher interest rates than conventional savings accounts, they often provide lower returns than other high-yield options.

Short-term Treasury bills

Short-term Treasury bills (T-bills) for business are a solid, low-risk investment choice featuring short-term debt securities issued by the U.S. Department of the Treasury. T-bills are among the most secure options, due to the full faith and credit of the U.S. government. You can protect your business’s capital, earn modest returns on excess cash, and maintain liquidity by purchasing these short-term securities.

T-bills come in various maturities, spanning from a few weeks (4 weeks) to one year (52 weeks), offering you great flexibility. Short-term T-bills generally refer to those with maturities of one year or less, making them ideal for businesses looking to manage cash reserves while maintaining a risk-averse profile.

The pros and cons of T-bills:

Pros:

1. Low risk: T-bills are issued and guaranteed by the U.S. government. With that secure backing, T-bills are considered to be very safe investments.
2. Liquidity: With short-term maturities, T-bills provide businesses the flexibility to quickly access their funds as needed.
3. Easy to buy and sell: Businesses can purchase T-bills through U.S. Treasury auctions, financial institutions, or brokerage firms. Plus, selling them in the secondary market before maturity is a simple process.
4. Exempt from state and local taxes: Interest earned on T-bills is exempt from state and local income taxes, making them a tax-efficient choice for businesses.

Cons:

1. Lower returns compared to other investments: T-bills provide lower returns compared to higher-risk investments like stocks or corporate bonds.
2. Interest rate risk: T-bill interest rates can fluctuate based on market conditions, and if rates rise, the value of existing T-bills may decline.
3. Inflation risk: Inflation increases can impact the real return on T-bills, as their real returns may not keep pace.
4. Opportunity cost: Tying funds up in T-bills may lead to lost investment opportunities in higher yield options.

Certificates of Deposit

Fintechs, banks, and credit unions offer CDs as a low-risk time investment option. When you invest your business’s cash reserves in a CD, you agree to deposit a specific amount of money for a fixed period, ranging from a few months to several years. In exchange, financial institutions reward businesses with a steady, fixed interest rate typically higher than traditional savings accounts.

The Pros and Cons of CDs:

Pros:

1. Low risk: With FDIC or NCUA insurance backing, CDs offer peace of mind for your funds, making them an excellent low-risk investment choice.
2. Fixed interest rate: A guaranteed fixed interest rate throughout your CD’s term provides a stable investment option.
3. Wide range of terms: A variety of term lengths allows you the flexibility to find the perfect fit for your business’s financial objectives and cash flow preferences.
4. Higher interest rates: When compared to traditional savings accounts, CDs generally offer higher interest rates, enabling you to earn more on your investment. 
5. No fees: Most CDs do not have monthly fees or maintenance charges eating into your returns, allowing you to keep more of your earned interest.

Cons:

1. Limited liquidity: Be aware that funds in a CD are committed for the investment’s duration, rendering them less accessible than more liquid options, such as HYDAs.
2. Early withdrawal penalties: Prematurely withdrawing funds from a CD may incur penalties, diminishing your earned interest or potentially impacting your principal investment.
3. Inflation risk: Should inflation increase, the fixed interest rate of a CD may not keep up, potentially undermining the actual value of your investment.
4. Lost opportunity cost: While CDs provide a secure and consistent return, their yield may be lower compared to riskier investment options, such as stocks or bonds.
5. Interest rate risk: If market interest rates rise substantially during the CD term, you might lose the opportunity to earn higher returns on your business’s cash reserves.

Municipal Bonds

A municipal bond is a debt security issued by a state, municipality, or local government entity to support public projects or services. Municipal bonds are primarily purchased by individual investors; however, businesses can invest cash reserves in these securities as part of their investment strategy or diversify their portfolios. 

There are two common types of municipal bonds: general obligation bonds (GO) and revenue bonds. GO bonds have the full faith and credit of the issuing municipality. In contrast, revenue bonds are supported by specific revenue streams the funded project creates, like tolls, user fees, or taxes.

The pros and cons of municipal bonds:

Pros:

1. Tax perks: Municipal bonds offer the advantage of interest generally exempt from federal income taxes and, in some cases, state and local taxes. 
2. Low risk: Thanks to their government backing, municipal bonds are seen as relatively low-risk investments compared to other securities like stocks or corporate bonds.
3. Diversification: Adding municipal bonds to your business’s investment mix can help diversify your portfolio and potentially reduce overall investment risk.
4. Positive social impact: By putting money into municipal bonds, your business can contribute to public projects and services that uplift local communities through infrastructure upgrades, schools, or hospitals.
5. Stable income stream: Municipal bonds are known for providing a reliable flow of interest income, making them a great option for businesses looking for steady cash flow from investments.

Cons:

1. Lower returns: Like most low-risk investment options, municipal bonds commonly offer lower returns compared to higher-risk investments. 
2. Interest rate risk: As with any fixed-income investment, municipal bonds are sensitive to changes in interest rates. If interest rates increase, the market value of existing bonds may decrease.
3. Credit risk: While municipal bonds are generally regarded as low risk, the credit quality and financial stability of the issuing municipality or government entity can vary. Risk of default exists if the issuer encounters economic challenges.
4. Liquidity risk: Certain municipal bonds may be less liquid than other investment types, potentially making it more difficult for businesses to sell their bonds at favorable prices when necessary.
5. Call risk: Some municipal bonds are callable, allowing the issuer to redeem the bonds before their maturity date. Consequently, businesses may experience lower returns than expected.

Conclusion:

We provided an overview of the top ways to earn interest on your business’s cash reserves and the pros and cons of each type of investment, but only you can decide where to go from here. Leverage your business’s cash reserves to their maximum potential. Dive in and look into high-yield bank accounts, high-yield savings accounts, money market accounts, short-term Treasury bills, certificates of deposit, and municipal bonds to find the right combination for your business.