FDIC Insurance Limits for Business Accounts

An effective cash management strategy is central to the success of any business. With effective use of a business banking account, you can meet day-to-day expenses and also purchase big-ticket items. In terms of business accounts, your FDIC insurance limits are the same as would be applicable to consumer accounts. To best take advantage of FDIC insurance, you must first define banking deposits.

For business accounts, FDIC coverage extends over checking, savings and money market deposit accounts alongside certificates of deposit. Again, FDIC insurance is only applicable to banking deposits, which excludes investment products. If a bank were ever to fail, the FDIC would provide to each depositor the funds they had at that bank either by setting them up with an account of equal value at another insured bank or cutting them a check for the amount if the funds owed.

According to the FDIC, their insurance limits are $250,000 for each depositor, for each bank and for each type of account ownership category. Since the FDIC originated in 1933, no money that was insured by the FDIC has been lost.

The FDIC explains that its insurance therefore does not cover money market securities, annuities, mutual funds, stocks and bonds. Investment products can lose value at any point in time. According to the FDIC, sweep accounts may or may not be covered, but it depends on whether the specific investment is a deposit.

Business accounts are covered by $250,000 in FDIC guarantees per depositor, per bank. As a larger depositor, you will divide a lump sum of cash between several different banks to maximize FDIC coverage.

For example, you would divide $300,000 between three separate $100,000 deposits at three different banks to insure the whole account. If you were to deposit $300,000 into one business account, you would leave $50,000 uninsured.

In exchange for safety of principal, you must be willing to accept lower returns for FDIC-insured business accounts. Because of their low returns, banking deposits are more exposed to interest rate and inflation risks.

With savings, interest rate risks describe situations when interest rates rise while you are locked into a relatively low rate. For example, you may take out a five-year certificate of deposit (CD) that pays out interest at a 4-percent rate. This CD would be less attractive if interest rates were to rise over the next year. At that point, five-year CDs may offer 7-percent interest rates.

Beyond interest rate risk, FDIC-insured business accounts are also subject to inflation risks that erode purchasing power of cash over time.

You will diversify your FDIC-insured business deposits to manage risks, provide liquidity and collect interest payments. For example, you can deposit six months' worth of business expenses into business checking and savings accounts to provide for your everyday expenses.

From there, you could put an additional three months' worth of business expenses into a money market deposit account and certificate of deposit. With this foundation, you can keep your business running and access funds to purchase equipment that generates additional cash flow in the future.