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Quick, what does FDIC stand for? Most accountants, finance managers and board members know that cash deposits in banks are insured for up to $100,000 per depositor, and the Federal Deposit Insurance Corporation is the insurer. They also know that any deposits in excess of $100,000 are at risk: if the bank fails, you are not likely to get all of it back.

A year ago, bank failures may have seemed like a remote bad dream. Now, we are watching as large banks go under. Is your nonprofit at risk? Its board or management team may think of their organization as small and cash poor, yet even small not for profits can find themselves with more than the FDIC insured amount deposited in their bank.

If your organization is at all successful in building reserves, it’s likely to have well over that $100,000 amount in cash or money market deposits. If it receives large grants in advance, chances are it’s in the same leaky boat. You can reduce your risk of losing those excess amounts to 0% (yes, zero) by opening accounts at several banks and moving money around when it’s needed. That means, if you have $500,000 in reserves, you’re dealing with 5 different banks. There’s an easier way to get to 0% risk that you may want to consider.

CDARS stands for Certificate of Deposit Account Registry Service, LLC. Banks become members of the Service and then make deposits on behalf of their customers at other member banks. The service makes sure that none of the deposit accounts carries a balance in excess of $100,000. The interest rate you negotiate applies to all the accounts, and they are all presented on one monthly statement to you.

CDARS has more than 2,200 member banks as of this writing. There’s likely to be a member bank in your area since most of the members are community or regional banks that are too small to be able to compete with big banks when it comes to spreading your money around safely.

I was curious to find out what benefits membership in CDARS brings to banks on the theory that someone is making money on this set-up. What I’ve discovered is that small banks benefit from having a network to help them with their own cash flow and depository issues, so they benefit directly without charging or – it seems – paying a fee. In other words, CDARS enables them to compete with the services larger banks can offer.

There’s one possible draw-back to buying CDs through CDARS. When you sign a CDARS agreement and deposit money with your bank, you will negotiate a CD rate that applies to all the CDs purchased with your money, even if some of the banks involved would have offered you a higher rate if you had deposited it directly with them rather than through the service. On the other hand, it’s also possible that you might have been offered a lower rate by said bank, in which case being with CDARS is an advantage. And you haven’t spent any at all making phone calls or visiting banks or requesting proposals -a true advantage!

You can find a list of banks that participate in CDARS at www.cdars.com, where you can search by state or by bank name.

Filed under: Business