Business bank accounts and investment accounts come with built-in security features, namely FDIC and SIPC insurance. These different types of coverage help protect your money in the unlikely case of a bank or brokerage firm failure, like what happened with Silicon Valley Bank in early 2023.
With FDIC and SIPC insurance, you can handle your business finances with confidence, knowing they are protected up to a certain amount. However, while they both offer peace of mind, they each operate differently and cover different types of assets. Let’s dive deeper to understand the differences between SIPC and FDIC insurance.
What is SIPC insurance?
SIPC stands for Securities Investor Protection Corporation, a nonprofit membership organization created as a result of the 1970 Securities Investor Protection Act.
SIPC insurance protects business investments in brokerage accounts. It was designed to help customers recover their money if a brokerage goes out of business or becomes insolvent.
What SIPC insurance covers and what it doesn’t cover
SIPC insurance covers up to $250,000 in cash and up to $500,000 in securities held by each SIPC member brokerage where you have an account.
The types of securities covered by SIPC include:
- Certificates of deposit (CDs)
- Treasury securities
- Stocks and bonds
- Money market funds
- Mutual funds
SIPC does not protect commodity futures contracts, investment contracts like limited partnerships, foreign exchange trades, or fixed annuity contracts not registered with the SEC. SIPC coverage also doesn’t protect you against investments that lose you money, as that’s part of the inherent risk of investing.
What is FDIC insurance?
FDIC stands for Federal Deposit Insurance Corporation and acts as an independent U.S. government agency to protect bank account losses occurring with a failed FDIC-insured financial institution.
What FDIC insurance covers and what it doesn’t cover
FDIC insurance will cover, dollar-for-dollar, up to $250,000 per depositor at an insured institution. This includes deposits made into:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- CDs
- NOW accounts
- Official bank checks, such as money orders and cashier’s checks
If you have deposits at the same financial institution under the same ownership category, the collective deposits are insured up to the FDIC insurance limit of $250,000. This means that if your deposits are held with the same insured bank but deposited at different branches, the amounts fall under one account ownership.
The scope of FDIC coverage does not include:
- Mutual funds
- Stock investments
- Bonds
- Annuities
- Municipal securities
- U.S. Treasury notes
- Safe deposit boxes or their contents
- Cryptocurrency assets
How can I get more than the FDIC insurance limit?
While the FDIC insures most of your deposits, there is a $250,000 cap on your coverage at each institution. For some businesses, that’s more than enough deposit coverage. However, for businesses with high balances, the standard limit can leave some deposits unprotected in the event of a bank failure.
To offer businesses additional FDIC protection, business checking accounts have started working with sweep networks to increase FDIC coverage for their customers—sometimes up to $3 million or more.
Sweep networks were created to assist business depositors in insuring balances totaling over the FDIC coverage limit of $250,000. When your bank works with a sweep network, they spread your deposits that exceed $250,000 across a network of FDIC-insured banks so that each account falls within the FDIC’s limits.
By spreading your business deposits across multiple banks, you can be sure that your money is protected up to an even higher amount—plus, you only have to maintain a business relationship with your primary bank to benefit from the added coverage.
SIPC insurance vs. FDIC insurance
Though they both offer protection for your business assets, FDIC and SIPC insurance have their differences. FDIC insures deposit accounts with a financial institution or bank, while SIPC insurance protects your brokerage account assets such as ETFs, stocks, and bonds.
They also have different coverage limits. For example, the FDIC will reimburse losses up to $250,000 for each type of account ownership category at each insured bank you have funds. SIPC coverage provides up to $500,000 in protection for security accounts or $250,000 for cash reserves.
Is it better to have FDIC or SIPC coverage?
Each agency protects different types of financial assets, so one isn’t superior to the other. If you have both brokerage accounts and bank accounts, ideally, you would have both types of coverage to offer comprehensive protection to your business assets.
When you open a new account for your business, make sure you choose a bank or broker that’s a member of the FDIC and/or SIPC.
The business checking account that empowers you to bank with confidence.
