Money market accounts vs money market funds: A guide for finance leaders of tech companies

Money market accounts vs money market funds: A guide for finance leaders of tech companies
Ledge Team
May 31, 2023
In this article:
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
See Ledge in action

In today's complex financial landscape where more businesses are evaluating their treasury management strategy, it's crucial for finance leaders to have a firm grasp of various investment and cash management options. 

Two such options are money market accounts (MMAs) and money market funds (MMFs). While they sound similar, there are some crucial differences. This article shines a light on: what are the key differences between these two financial instruments? What considerations are there for implementing each? Which one is right for you?

TL;DR

  • The main goal for treasury management for earlier-stage startups is to just preserve cash and not take any unnecessary credit risk
  • For later-stage companies or companies with a large cash balance, the focus should tilt more toward yield and preventing a loss of value due to inflation
  • Many VC firms tend to encourage portfolio companies to use money market funds rather than money market accounts
  • While FDIC insurance is great in regard to MMAs, most companies have a cash balance significantly in excess of $250k, and in that case, they essentially are then taking counterparty credit risk with their bank provider
  • With money market funds, assuming they are only invested in US treasuries or securities explicitly fully backed by the full faith and credit of the US government, there is essentially zero credit risk

Money market account (MMA)

A money market account is a type of interest-bearing deposit account offered by banks and credit unions. It can be described as a mix between a checking account and a savings account. MMAs typically have higher interest rates than regular savings accounts but require a higher minimum balance and limit the number of transactions per month.

Key considerations for implementing an MMA:

  • Competitive interest rates: MMAs usually offer competitive interest rates, making them an attractive option for cash management.
  • Good liquidity: These accounts provide easy access to your funds, with limited check-writing and withdrawal capabilities.
  • Insured by the FDIC: MMAs are insured by the FDIC or NCUA, ensuring the safety of your deposits up to a certain limit ($250,000 per depositor, per institution).
  • High minimum balance requirements: MMAs often have higher minimum balance requirements than regular savings accounts, sometimes as high as $25,000.
  • Transaction limits: Federal regulations limit the number of certain types of withdrawals and transfers to six per month.

When MMAs are recommended:

MMAs are typically viewed as good for short-term cash management, when you want to maintain liquidity while earning interest, and are a good low-risk option for parking your funds somewhere insured.

When MMAs aren’t recommended:

MMAs are not recommended if you require frequent transactions or access to your funds or if you’re looking for long-term, very high-yield investment options. 

And it’s important to remember: While FDIC insurance is great, most companies have a cash balance significantly in excess of $250K. Even though a lot of fintech providers now offer products that roll up several separate accounts to offer a higher FDIC insurance amount, in a worst case scenario, even if an account is backstopped by the FDIC, it may take a while for those funds to be accessed which could cause a short-term liquidity issue. 

In the case where a company has balances above $250K, they essentially are then taking counterparty credit risk with their bank provider.

Money market fund (MMF)

A money market fund is a type of mutual fund that invests in short-term, high-quality debt securities, such as treasury bills, commercial paper, and certificates of deposit. The goal is to maintain a stable net asset value (NAV) of $1 per share while generating income through interest.

Key considerations for implementing an MMF:

  • Liquidity: MMFs provide daily liquidity, allowing you to access your funds easily.
  • Risk: While these funds carry minimal risk, they are not insured by the FDIC or NCUA. 
  • Returns: MMFs generally offer lower returns compared to other investment options, due to their focus on safety and liquidity.
  • Expenses: Some MMFs may have management fees and expense ratios, which could impact your overall returns.
  • Tax implications: Depending on the type of securities held, MMFs may generate taxable income.

When MMFs are recommended:

MMFs are also considered to be low-risk short-term cash management solutions that guarantee liquidity while earning returns. Assuming they are only invested in US treasuries or securities explicitly fully backed by the full faith and credit of the US government (and most VCs don’t recommend money market funds which invest in anything other than these), there is essentially zero credit risk.

When MMFs are not recommended:

MMFs aren’t recommended if you’re seeking high returns on investments or if you require the safety of FDIC or NCUA insurance.

money market account vs money market fund

Challenges to consider when managing MMAs and MMFs

Managing money market accounts (MMAs) and money market funds (MMFs) can present some challenges for finance leaders such as:

Maintaining visibility and control: Managing multiple bank accounts and investment funds can lead to difficulties in monitoring account balances, transactions, and overall financial performance. Finance leaders need to ensure they have a clear and accurate view of their company's cash position at all times.

Cash flow forecasting: Accurate cash flow forecasting is essential for effective financial planning and decision-making. However, managing multiple accounts and funds can complicate the process, making it more challenging to predict cash inflows and outflows and allocate resources efficiently.

Reconciling transactions: With multiple accounts and funds, finance leaders will need to reconcile transactions and balances across these accounts regularly. This process can be time-consuming and prone to errors, especially if done manually.

Compliance and regulatory requirements: Companies must adhere to various regulations and reporting requirements when managing their finances. Finance leaders must ensure they are compliant with these regulations while managing multiple accounts and funds, which may involve additional administrative tasks and complexities.

Fee management: MMFs often have management fees and expense ratios, which can impact overall returns. Finance leaders must be mindful of these costs when managing funds and ensure that they do not outweigh the potential benefits of the investment.

Strategies to effectively manage MMAs and MMFs

Implement robust financial management software: Use financial management software that provides real-time visibility into account balances, transactions, and overall financial performance. The tool should be able to consolidate data from multiple sources and provide customizable reports and dashboards.

Automate processes: Automate processes such as transaction reconciliation, cash flow forecasting, and reporting to reduce manual tasks, save time, and minimize errors.

Establish clear policies and procedures: Develop and implement clear policies and procedures for managing MMAs, MMFs, and other financial accounts. Ensure that employees understand their responsibilities and are trained on these procedures.

Monitor counterparty risk: Regularly assess the creditworthiness of the fund providers and other counterparties to mitigate potential risks. Stay informed about market conditions and news that may impact the stability of your investments.

Periodically review fees and expenses: Regularly review the fees and expenses associated with your MMFs and other investments to ensure that they are justified and do not erode returns.

By implementing these strategies, finance leaders can more effectively manage multiple accounts and funds while maintaining visibility and control over their company's finances.

Hopefully this guide will help you as a finance leader make informed decisions when choosing between MMAs and MMFs. As the financial landscape evolves, it is essential to stay informed and adapt strategies accordingly. Consulting with a financial advisor can provide valuable insights and guidance in developing a treasury strategy that best aligns with your business objectives.

We're on a mission to automate and simplify finance operations for teams working at scale.

New York

325 Hudson St, 4th Floor, New York, United States 10013

Tel Aviv

8 Shaul HaMelech St. Tel Aviv, Israel 6416202