The ins and outs of business term deposits
Whether it’s your business or your SMSF, a term deposit could be a great short term investment option and a safe place to park your cash. Business term deposits are available from Australian banks and financial institutions, but as you’d expect, there are a number of different interest rates and features that you’ll want to weigh up before opening an account.
Read on below for a run through of all the ins and outs of a business term deposit, as well as answers to some of the most commonly asked questions (FAQs) about them.
Business term deposit rates and features
Let’s start with the feature that’s most likely to pique your interest. Of course, we’re talking about the interest rate, which is important because it will determine just how much interest you’ll receive on your deposit once it’s matured. After all, the higher the rate, the more interest you’ll get!
For example, a $25,000 deposit invested over a five year term would generate $3,125 in interest with a rate of 2.50%. However, if that same $25,000 was deposited in an account with a rate of 1.50%, it would only generate $1,875 in interest.
Interest rates are usually linked to the investment term, so it’s a good idea to compare between term lengths. While it’s generally true that a longer term length will come with a higher interest rate, that’s not always the case as you might find that the rate for a three month deposit could be more than a six month one. Head to Mozo's Term Deposits Interest Rates page, for the latest information on term deposit interest rates.
Other than the interest rate and term length, you may also want to consider:
- The minimum investment amount: With some business term deposits you’ll generally need to have a higher investment amount than with a personal term deposit. Some banks have a minimum deposit of $10,000 while others will only have a minimum deposit of $5,000.
- The maximum investment amount: Most business term deposits also come with a maximum investment amount, with the lowest cap around $250,000. However, most term deposits will allow you to invest up to $1,000,000 and over.
- Where your interest can be paid: This may not be a huge concern, but some banks will only allow you to have your term deposit interest paid into an account with the same bank, whereas others will allow you to nominate an account from any bank.
Traps to avoid with business term deposits
Before you go ahead and lock away your company’s money, there are a few common term deposit traps that you’ll want to make sure you avoid.
Auto rollovers: When the time is getting near to the end of the investment term your bank will often let you know about a rollover option. This means that your existing business term deposit will get rolled over to a new term. While there is nothing wrong with this, before accepting the auto rollover rate you may want to do some quick term deposit rate shopping on Mozo to compare the new rate you’re being offered against other business term deposits on the market.
Early withdrawal penalties: Before you settle on an investment term, particularly if you are thinking of a longer term in 2-5 year region, you’ll want to be sure that you are not going to need that money sooner. That’s because term deposits come with break fees which mean that if your business needs to take that money out sooner than the time you’ve initially agreed on, you are likely going to have to pay a fee.
Low interest rates: Don’t settle for low interest rates on your term deposit just because you already have a business bank account with a particular bank. These days most term deposits can be opened online and challenger banks and credit unions often have more competitive rates than the big four banks. The higher your interest rate, the more money you’ll get back at the end of the term, so be sure to shop around.