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Future Entrepreneurs Should Use CDs to Raise Capital

3 Mins read
  • Anyone thinking about starting a business may want to try investing in a CD to grow their capital.

You may be dreaming about starting your own business. But do you have everything that you need to do so? One of the things that most entrepreneurs struggle to do is raise money to cover startup costs. we talked about bootstrapping money by getting a business loan, but there are other options that need to be considered.

The Small Business Administration estimates that most small businesses need to spend around $3,000 to get started. However, many businesses have much higher startup costs.

If you are trying to start a business, then you may need to find a way to fund it. One thing that you may want to do is invest in a certificate of deposit. This is a low risk way to grow money faster than the rate of inflation with virtually no risk (as long as it is below the FDIC limit). A CD can also be a good investment for an existing growing business.

Future Business Owners Can Consider Investing in CDs to Grow Startup Capital

Certificates of Deposit (CD), represent a financial product that banks and various financial institutions offer for investment purposes. Distinguished from standard savings or checking accounts, as well as stocks and bonds, CDs possess unique characteristics. They serve as an attractive avenue for individuals seeking elevated interest rates on their savings without exposure to the uncertainties of the stock market. Therefore, they can be great for business owners trying to raise money for capital. Nerd Wallet even has a great article on good CDs for business owners specifically.

This article will guide you in detail on what is a certificate of deposit, how it works, and its features.

Certificate of Deposits and Its Features

Do you want to know what a certificate of deposit is?A  CD is a savings account that provides a fixed interest rate for funds over a predetermined duration. Available through banks and credit unions alike, CDs distinguish themselves from regular savings accounts by requiring that deposited funds remain untouched for the entirety of the agreed-upon term; otherwise, penalties may apply. Typically, CDs offer higher interest rates than savings accounts, serving as a reward for relinquishing the flexibility to withdraw funds at will.

Below are some key attributes of CDs and how they compare to other financial tools.

  • You can obtain certificates of deposit with a minimum deposit amount or in subsequent multiples.
  • Some Scheduled Commercial Banks (SCBs) and reputed Financial Institutions issue certificates of deposit, while other local banking institutions are ineligible for CD issuance.
  • SCBs typically offer CDs with term periods ranging from 3 months to 1 year, while financial institutions extend term periods from 1 year to 3 years.
  • You can transfer Dematerialized CDs through endorsement or delivery, akin to dematerialized securities.
  • There is no mandatory lock-in period for certificates of deposit.
  • CDs are fully taxable in some countries.

Initiating a CD is similar to opening a standard bank deposit account, albeit with divergent terms upon agreement. Once your CD is established and funded, the bank or credit union will manage it similarly to other deposit accounts, including monthly or quarterly statement cycles, issuance of paper or electronic statements, and monthly or quarterly interest payments directed to your CD balance for compounding.

As you know what a certificate of deposit is, you need to remember one thing: After carefully considering the CD(s) you intend to open, finalizing the procedure commits you to four key elements.

  • Most CDs feature a fixed interest rate, though variable-rate CDs exist, potentially yielding higher returns in the event of rate hikes. With a fixed-rate CD, the predetermined earnings by the term’s conclusion are clear, yet subsequent rate increases could pose a disadvantage post-lock-in.
  • Save for select specialty CDs. This denotes the initial deposit amount agreed upon during CD initiation.
  • This signifies the duration you commit to deposit funds to avoid penalties (e.g., 6-month CDs, 1-year CDs, 18-month CDs, etc.). The term concludes on the maturity date, when your CD fully matures, enabling penalty-free fund withdrawal.
  • The bank or credit union where you establish your CD determines various agreement aspects, including early withdrawal penalties (EWPs) and whether your CD will be reinvested automatically if no alternative instructions are provided upon maturity.

When selecting a CD, you must consider several crucial factors, such as term duration, interest rate, and deposit size. Here are some considerations to ponder as you explore your options.

  1. Be attentive to account terms that align best with your objectives. CDs commonly offer terms tailored to accommodate various savings objectives.
  1. Some accounts require a modest minimum deposit, often yielding a lower rate of return, while others mandate a higher minimum deposit, which correlates with a higher rate of return. Opting for a deposit amount that would not be needed during the chosen term is advisable.

Conclusion

The article has made every concept crystal clear for you: what a certificate of deposit is, its features, and itsfactors. Therefore, a CD represents a low-risk savings vehicle supported by the government and insured. It provides a superior interest rate than traditional savings accounts, requiring you to commit your funds to the account for a predetermined period. Similar to other financial instruments affected by interest rate hikes, CDs may present the potential for increased returns. Most CDs feature fixed terms, spanning from one month to five years or longer. You may withdraw your funds, transfer them to another bank account, or reinvest them in another CD.

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About author
Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.
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