Term deposit

What it means

A term deposit is money placed with a bank for an agreed period, such as a month, a year or longer, at an agreed interest rate. During the term the money usually cannot be accessed without a penalty, such as losing interest or paying an early withdrawal fee.

For companies, a term deposit is a simple way to earn a return on temporarily idle cash, such as money set aside for tax, an investment or seasonal purchases. The rate is usually higher than on a current account, and deposits up to the statutory limit are protected by the deposit guarantee scheme.

Term deposits are one of the basic treasury tools for smaller companies. The key is to align the term with the cash flow plan so the company does not have to break the deposit early when it needs the money.

How it works in practice

For clients holding larger reserves, we prepare a simple cash plan several months ahead. It shows how much money the company can tie up and for how long, and how much must stay in the current account as a buffer for fluctuations.

In the accounts, a term deposit is kept in a separate account from the current account. Interest is recognised as finance income in the period it relates to, even if it is paid only at maturity. For a longer deposit spanning year-end, interest must be accrued.

For tax purposes, interest earned by a legal entity forms part of its tax base and is taxed with other income. For individuals, banks usually tax deposit interest by withholding, so it is not reported in the tax return.

What to watch out for

The most common mistake is tying up too much cash for too long. If the company then needs money for invoices or taxes, it has to break the deposit with a penalty or borrow at a higher cost, and the loss easily exceeds the interest earned.

Remember the deposit guarantee limit per depositor per bank. For larger sums it is sensible to spread deposits across several banks and to watch the bank’s financial stability, not just the rate on offer.