Determining how to maximize funds in this interest rate environment over the past year has been quite the challenge. After several years of the fed cutting interest rates, beginning the second half of 2019, the fed has significantly increased rates in order to get a handle on inflation. It’s uncertain how long it will take the economy to bounce back, making it difficult to decide what to do with excess funds. Below are a few recommendations on what you may want to consider, depending on your goals.

Assess your accounts
What types of accounts do you have your funds in? Are they simply sitting in a non-interest-bearing deposit account? Are you sweeping into a money market or paying down your line of credit?

No matter how high rates go, you should not substitute adequate liquidity for your day-to-day business and the unexpected. High rates are not the only consideration in this environment. If an unanticipated event occurred, do you have access to cash to respond quickly?

Above this threshold, consider what idle funds you may have in transactional accounts. Talk with a trusted treasury management professional to determine if a sweep account to another transaction, investment, line of credit, or a combination of, may be a good option for you. A good treasury professional will not only help you determine the right structure, but if you are a client with a good banking relationship, help customize rates and terms to give you the best returns.

Know your investment policy

Depending upon the size and type of business you are, you may not have an investment policy. If you do, review your policy to see what responsibilities you have to manage your funds. In the present economic environment, make sure it is flexible enough to make the right decisions for your business. Safety of principal should always be a top priority, not only higher returns. Talk with your banker about the best allocation between security and yield. Your bank may have a wealth management division or a third-party provider they contract with to offer investment services. Ask your relationship manager to set up an appointment so you can get educated and vet all of your options. If you are going into investments, consider laddered options that allow you to invest funds over time. This may be beneficial if you are unsure how much liquidity you’ll need or if interest rates will continue to rise. Finally, whatever you execute, make sure it fits your business model and risk profile. Don’t go into an aggressive policy if you are traditionally conservative business. Finally, review your policy at least once per year and perhaps more often until we are in a less volatile environment.

Determine the security of your funds

The FDIC insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. You do not need to purchase deposit insurance. If you open a deposit account in an FDIC-insured bank, you are automatically covered.

Ask your banker how you can gain coverage over the FDIC insurance limits if you have funds over the covered limits. Even if you can earn a higher interest rate in an investment, consider the risk. If you earn less but your bank is able to collateralize your deposits, you may find that added security is more important than a riskier investment. You may also have liquidity associated with collateralized accounts vs. funds locked in an investment that cannot be accessed without penalty. There is no set structure that fits every business. Understand your culture, risk profile, and also keep top of mind, the key principles of security, liquidity, and responsibility to your employees and shareholders when you determine how to allocate your funds. Your treasury management professional can help your business navigate this. For a free consultation, call 414-235-5262.

By Melinda M. Toy, CTP