What is a Term Deposit?

A term deposit is a straightforward way to earn interest on extra cash. You deposit a set amount for a fixed term, and the bank pays a fixed interest rate. For many businesses in the UK, this is often the first step after using an instant access account.

While term deposits are simple, they come with important trade-offs, especially for organisations with large balances above deposit protection limits. This guide explains how term deposits work, how interest is calculated, and what finance teams should think about before locking in cash for a set period.

Term deposits explained

A term deposit means putting cash in a bank or building society for a set time at a fixed interest rate. Terms can be as short as overnight or as long as several years, but most UK options last from one month to five years. Usually, you can't withdraw the money before the end date without a penalty. Some deposits can’t be accessed early at all.

When the term ends, you get back your original amount plus the interest earned. Many banks will offer to renew the deposit for a new term at the current rate.

Term deposits around the world

This product has several names. In the UK, retail versions are called fixed-rate bonds or fixed-term savings accounts, while banks call the business version a fixed-term deposit or treasury deposit. In Australia and New Zealand, it's called a term deposit; in India, it's a fixed deposit, and in the US, the closest match is a certificate of deposit (CD) or a time deposit.

No matter what it's called, the basics are the same: you put in a fixed amount for a set time at a fixed rate. Treasurers should note one difference. CDs may be tradeable in the secondary market, but the price depends on where rates have moved since it was bought, so you may get back less than you paid.

How does a fixed term deposit account work?

To open a business term deposit, you agree on the amount, term, and rate with the bank, then transfer the money. There is often a minimum deposit where the best rates usually go to larger amounts placed through the bank’s treasury or markets desk. Once set up, the rate stays the same for the whole term, even if interest rates change later.

How interest is paid

For shorter terms, interest is usually paid at the end along with your original deposit. Longer-term deposits might pay interest monthly, quarterly, or annually, which can help organisations that want regular income. Depending on the account terms, interest is either paid into your operating account or added to the deposit balance, where it compounds for the rest of the term.

What happens at maturity

Before the term ends, the bank usually contacts you to ask what you want to do next. You can withdraw your money, reinvest the principal and take the interest, or roll over the whole sum. If you don’t respond, some banks renew the deposit automatically, while others move your money to an instant access account with a much lower rate.

Tracking when your deposit matures and comparing rollover rates with the market helps protect your returns. If you let a deposit renew automatically, you might end up earning much less than what’s available elsewhere. The best option last time may not be the best one this time.

How is term deposit interest calculated?

Most term deposits pay simple interest on the starting amount for the whole term. In the UK, interest is usually worked out using an actual/365 day count. The formula is principal × rate × days ÷ 365.

If a company puts £2 million in a term deposit for six months (182 days) at a 4.00% rate, the interest at maturity would be £2,000,000 × 4.00% × 182 ÷ 365, which is about £39,890. The company would get £2,039,890 in total when the term ends.

The rate in this example is for illustration only. Actual rates depend on the bank, the term, and the deposit size. Sterling deposits use an actual/365 day count, but US dollar and euro deposits usually use actual/360. If you hold cash in more than one currency, check that offers are quoted on the same rate measure and day-count basis before you compare them.

What determines term deposit rates?

Banks set term deposit rates based on market interest rates, mainly the Bank Rate and SONIA, and what they expect rates to do in the future. The rate you get is usually lower than the wholesale market rate because the bank needs to make a margin. How much lower depends on how much the bank needs to borrow for that term.

Regulations also affect rates. Banks must keep high-quality liquid assets for deposits that could be withdrawn within 30 days. Banks see corporate deposits locked in for longer than 30 days as more stable, so they often pay more for terms over one month.

How is term deposit interest calculated?

Rates change often, so no single bank stays on top for long. Comparison tables show the highest rates, which works well for retail savers with deposit insurance. For businesses with large sums, a bank’s strength should matter as much as the rate. A higher rate from a weaker bank might not be better once you consider credit risk. 

Are term deposits safe?

The Financial Services Compensation Scheme protects eligible deposits with UK-authorised banks and building societies. Since 1 December 2025, the limit has been £120,000 per eligible depositor, per authorised firm. Most businesses are eligible, including large companies, though some organisations such as financial institutions are excluded.

This limit is enough for most individual savers, but it only covers 2.4% of a £5 million business deposit with one bank. Banks that share a licence also share the same limit, so spreading money across brands under the same licence does not give extra protection.

Counterparty risk for corporate deposits

If your deposit is above the FSCS limit, it’s an unsecured claim on the bank. If the bank fails, the law ranks deposits differently depending on who holds them. Deposits from individuals and micro, small, and medium-sized enterprises rank ahead of ordinary creditors, even above the FSCS limit. Large corporate deposits above the limit get no such preference. They rank alongside other senior unsecured creditors, and the whole uncovered amount could be lost in a bail-in situation. The bank failures of spring 2023 showed how quickly conditions can change for corporate depositors.

To manage this risk, check each bank’s credit quality and limit how much you put with any one bank. Many treasurers diversify cash across several banks, but each new provider requires more time spent on admin and relationship management.

Advantages and limitations of term deposits

Advantages

A term deposit gives you certainty because the rate is set in advance and you can predict your return for cash flow planning. They are easy to set up with your current bank, usually have no fees, and often pay more than an instant access account.

Limitations

The main downside is liquidity. Once you put cash in a term deposit, you usually can’t access it until maturity, especially as many business deposits cannot be ended early. Penalties are often set as several days' or months' interest, so check the terms before you commit.

A fixed rate can also be a drawback, since you are locked in at the agreed rate until maturity, even if market rates go up. Credit risk is the other key limitation. Above the FSCS limit, a term deposit is an unsecured claim on the bank. If the bank fails, you could lose part of your deposit, and holding most of your cash with a few banks increases that exposure.

Is it worth putting money in a term deposit?

Whether a term deposit is right depends on how sure you are about your cash needs. Start by dividing your cash based on purpose. Operating cash should stay available, but reserve or strategic cash can often be locked in for longer.

Term deposits work well for cash you know you won’t need until a certain date. By spreading deposits so one matures each month or quarter, you get regular access without losing much return. There is liquidity risk involved in this process, so make sure you’ve considered this thoroughly.

Term deposits and other options for business cash

Term deposits are just one option for surplus cash. Each alternative balances liquidity, credit risk, and return differently. The best mix depends on your cash forecast and investment policy.

Notice accounts

A notice account pays interest on money you can withdraw after giving notice, usually between one and six months. It offers more flexibility than a term deposit, but the rate can change during the notice period. The bank still bears the credit risk.

Money market funds

Money market funds let you access your cash the same day or next day and spread your money across many issuers. They pool investors’ cash and are not covered by the FSCS. Their investments last longer than the liquidity they offer. Our guide to money market funds explains more.

Treasury bills

Treasury bills move the credit risk from a bank to a highly rated government, for terms up to a year. You buy them at a discount and get paid the full amount at maturity. Direct access needs a dealer relationship and custody setup. Our full guide to Treasury bills has more details.

Secured lending through repo

In a reverse repo, you lend cash and receive high-quality collateral, held by an independent tri-party agent. The collateral is worth more than the cash you lent, which gives a buffer if its market value falls. If the borrower defaults, the agent sells the collateral to repay what you are owed. Our guide to repurchase and reverse repurchase agreements explains how this works.

Choosing the right home for surplus cash

Term deposits remain a simple, reliable way to earn interest on cash you don’t need right away. If your business has large balances, consider credit risk and liquidity alongside the rate. Knowing exactly how much cash is surplus, and for how long, makes the decision easier.

If you want to compare term deposits with other options for your cash, contact our team. We can show you how a fixed-rate, single-issuer structure could work with your current deposits.

For anyone who can’t tell the difference between their COP and their CCP, we’ve introduced our Treasury & Cash Investment Glossary.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.