Banking

Text A. Types of accounts

Checking Account. Generally speaking, banks are not permitted to pay interest on the balances in business checking accounts. The primary exceptions to this rule are accounts of business partnerships and “not-for-profit” organizations. If you seek this exception, you will be required by the bank to prove your company’s eligibility.

Both business and personal checking accounts are referred to in banking regulations as transaction accounts. Although banks may not pay interest on business checking accounts, most businesses can achieve the same thing by having their accounts placed on an “analysis” basis. Under such an arrangement, the bank gives the customer an earnings credit for most of the interest income it earns on the average balances left in the checking account. The bank then offsets against those earnings all the costs incurred while servicing the account during the period in question. A report, or account analysis, detailing all the earnings and expenses on the account is sent to the customer at each period end, usually each month.

Savings Accounts. Any business is permitted to keep a savings account with a bank. Interest-bearing deposit accounts, including savings accounts, pay a yield determined by the length of time funds are deposited the posted rate of interest. By the law, the yield is expressed as an Annualized Percentage Yield (APY), which is meant to help comparison shopping rates at competing financial institutions. The APY is calculated according to a formula that assumes the funds will be left in the account for a full 365-day year. Actual interest earned will be less if frequent withdrawals are made or funds are deposited for less than a year.

Certificates of Deposit. Certificates of deposit pay higher interest rates than those offered for savings accounts and money market deposit accounts and higher than the earnings credit used by banks in their account analysis. Under normal conditions, the longer the maturity of the CD, the higher the rate it will bear. Unlike savings account rates, which change only rarely, the rates on certificates of deposit change daily at some banks and weekly at many others. Many banks have a special phone number you can call in order to learn their latest rates.

As certificates of deposit bear higher interest rates, they can be an excellent parking place for temporary funds. However, many banks charge penalties for withdrawals before maturity. the penalties can significantly reduce the return on your deposits, making it mandatory for you to use good cash management techniques if you are going to try to maximize company earnings by putting excess funds in CDs.

Text B. The different kinds of balances

Ledger Balances.

Ledger balances are the balance figures shown on your statement even though they include balances that don’t really exist at that time because the bank holding your account has not had time to collect recently deposited checks from the issuing bank.

If your statement period ends the same day you make a deposit to your account, for example, your statement will show an increase in your balance equal to the amount of that deposit. The statement will not show that in fact that check was not delivered to the bank of account until after the close of business that day, so that the money represented by the check had not actually been collected as of the end of the business day. the deposit at that point is what is known a ledger balance; until the funds are actually collected the next day, the deposit in your account is incapable of earning any interest for your bank.

Collected Balances. The balance, called a collected balance or a good balance, is money that the bank can actually invest, spend, or pay out as it chooses.

Many banks do pay interest on a deposit beginning with the day of deposit, but they are actually paying interest for at least one day, maybe two, on money they haven’t received. While “interest from the day of deposit” is a catchy slogan, it is also an expensive practice, and, as computer technology advances and becomes more affordable, more and more banks are acquiring the ability to defer payment of interest on deposits until the money is actually collected.

Available Balances. Available balances, or investable balances, represent the actual balances on which the bank can earn a return. The income earned from the investment of those available balances is typically used by the bank to offset the expenses incurred in the normal day-to-day operation of that account.

Deferred Funds. Funds that have been deposited in a bank but that the bank will not permit to be withdrawn for a period of time ranging from a few days to as many as 30 days are called deferred funds. In most commercial banks are deferred on new accounts only, especially if the new account is that of someone unknown to the bank.

Banks follow the practice of deferring balances to minimize the likelihood of fraud or embezzlement. But such schemes impact and offend good customers. So, since 1990, availability of funds may not be deferred for more than two days for local checks or more than five days for nonlocal checks. Funds availability regulations also recognize the new-account problem and do not limit restrictions on availability of deposits into new accounts fir the first 30 days, with the exception of treasury and government checks and cashier’s checks.

Compensating Balances. Banking charges for a variety of services are often paid by keeping a specified balance in a checking account, as opposed to having the bank deduct payment from your account for each service provided. This compensating balance offsets the bank’s cost of servicing account relationship. The compensating balance method of payment is common in cash management services. If you negotiate a bank loan or line of credit, you may have to keep part of the loan proceeds in a checking account. The compensating balance is the cost of maintaining that credit availability. In exchange for keeping part of the loan in your checking account, you may get a break in the interest rate charged on the loan.