Why you might choose a term deposit for your business

Taking out a term deposit can be a good way to manage any surplus funds you have accrued through your business. However, there are a few things worth considering before choosing this simple investment option.

What is a term deposit?

When you take out a term deposit:

 

• Your money is invested at a fixed interest rate for a fixed period of time (known as the ‘term’).
• In most instances you won’t be able to access it until the end of the term, without losing the full benefit of the fixed interest rate.
• The percentage interest your term deposit earns will depend on a number of factors, such as the term selected, the amount being invested and the frequency of interest payment.

What are the benefits of a term deposit?

With a term deposit – such as a Westpac Business Term Deposit¹ – you’ll know in advance how much interest you’ll earn. This gives you the reassurance of knowing exactly what the return on your investment will be for your business.

 

If market conditions change and interest rates drop, you’ll still benefit from the interest rate fixed at the start of the term (though conversely, you won’t enjoy the extra benefit of an interest rate rise).

 

Additional benefits of investing surplus cash into a Westpac Business Term Deposit include:

 

• There are no set up, monthly service, or management fees (though other fees may apply¹).
• You can renew your term deposit online – and sometimes you may be offered a special rate to do so.

 

Term deposits are generally considered a safe investment:

 

• Term deposits don’t have the volatility of other investments such as property or shares.
• If you take out a term deposit at a recognised Australian financial institution (such as Westpac), your term deposit up to a maximum deposit of $250,000 per business and per Australian financial institution, is guaranteed by the Government.

 

Term deposits can also help you resist the temptation to dip into surplus business income. Instead, it will be making you money through the interest accrued.

What about any downsides?

There are three key things you should consider before taking out a term deposit:

 

1. Will I need to access the cash?

You won’t be able to access your money during the term selected, without losing the full benefit of the fixed interest rate. 

 

2. Will I need access to cash fast?

You’ll likely have to give notice to withdraw – generally 31 days for a Westpac Business Term Deposit – so it’s important to consider carefully if your business may need immediate access to the cash during the length of your proposed term deposit.

 

3. Have I chosen the right time?

Changes in interest rates can sometimes go against you. If interest rates rise once you’ve locked your money into a term deposit, you won’t be able to benefit from the higher interest rate. 

Choosing the right term

The length of time you choose to move funds into a term deposit varies by provider. Generally, the longer the length of the term, the higher the interest rate, although this isn’t always the case.

 

For example, Westpac Business Term Deposits are divided into three tiers:

 

• 1 to 23 months for those who don’t want to lock their savings away for a longer period, or who speculate that interest rates may rise.
• 24 to 35 months to gain what is generally a higher interest rate.
• Greater than 36 months for when interest rates are high, for those who wish to grow their savings, or earn an income from the interest accrued during the length of the term deposit.

How is the interest paid?

The amount of interest paid also varies by provider. With a Westpac Business Term Deposit you can choose to have the interest paid monthly, annually or at maturity (when the term ends). 

 

The frequency you have interest paid is likely to impact the interest rate offered.

What happens at the end of the term?

When, for example, a Westpac Business Term Deposit matures, you can generally reinvest it into a new term deposit (with or without the interest earned), reinvest a different amount, or have the money deposited back to you.

If you’re set up for online banking, this can generally all be done without the need to visit a branch. 

Is a term deposit right for my business?

As with all investments, it’s important to consider your own situation. Here are some factors to weigh up:

 

• What are your short and long term business goals?

Do you have a specific goal in mind such as saving for equipment, inventory or new premises, or do you want to earn an income from the interest you’ll earn? These factors will also influence what term would be appropriate for your needs.

 

• Are you a disciplined saver?

If you’ve got some money put away in a savings account or have surplus cash, a term deposit could be a form of ‘forced saving’. In most cases, you won’t be able to access the money until the end of the term, without losing the full benefit of the fixed interest rate. On the flipside though, you’ll have to be sure you won’t need to access the money during the term.

 

• What are interest rates like?

Depending on market conditions, interest rates may be higher or lower when compared to other savings products. If interest rates are up, you could benefit from locking in a higher interest rate. Once you’ve selected a term you won’t be able to benefit should interest rates go even higher, but you’ll be protected for the length of the term if interest rates go down.

How easy is it to open a term deposit?

In the case of Westpac, once you’ve visited our Business Term Deposit page and selected the term and the amount you want to put away, setting up the term deposit can be as easy as applying online (if you are eligible to do so). It should take less than ten minutes¹.

 

So you won’t have to head into a branch if you don’t want to, or contact your relationship manager.

 

Also, you may be eligible for a bonus rate on top of the standard rates. You can check if you’re eligible by signing into Westpac Live Online Banking¹.