Boss Lady

Top strategies to invest your business profits

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The United States is jam-packed with small businesses, home to 31.7 million of them as of 2020. Despite their importance on the national economy, many businesses fail soon after starting, quickly being replaced by prospective entrepreneurs. According to the U.S. Bureau of Labor Statistics, roughly half of all businesses fail within five years.

Handling your business’s profits is directly related to sustaining success. Let’s discuss how to manage your cash surplus.

What should you do with extra cash?

As you know, cash is the lifeblood of business. You use cash to maintain inventory, buy supplies, pay workers — pretty much everything. Consistently having a cash surplus feels great as a business owner. Although keeping this cash around might provide comfort, you should always keep your bankroll in action.

Paying debt — The reliable, proven option

Paying debt and investing are the two best uses of a cash surplus. Without fail, paying debt almost always takes precedence over investing. Whether it be mortgages or lines of credit, debt accumulates interest faster than investments. In general, any investments that claim to yield higher interest rates than your outstanding debt are highly risky.

Are you ready for investing?

According to Nav, traditional bank loans typically sport annual interest rates between 2% and 13%. SBA loans, another popular form of business lending, have interest rates between 7.75% and 10.25%.

Since most worthwhile investments don’t yield more return than these loans, you should pay your debt before considering investing. However, prepayment penalties could give you a valid reason to invest.

The SBA’s 7(a) loan program is the federal agency’s most popular lending setup. Under this program, if you pay 25% of your loan’s balance within the first three years, you face prepayment fees. Traditional bank loans may also enforce prepayment penalties.

Essential investment characteristics you should never overlook

We can define financial instruments with hundreds of terms. In their most basic form, investment descriptors can be broken down into four areas: risk, liquidity, maturity, and yield.

Risk and yield

As a business owner, you’re probably geared toward long-term sustenance. Unless you’re a serial entrepreneur creating startups with the intention of selling them in a few years, avoiding risk is essential to success. By definition, low-risk investments confine you to relatively low yields.

Maturity

SBA loans’ prepayment fees don’t apply after the first three years. Since you can start paying these loans off after their third birthday, don’t invest in opportunities that take longer than three years to pay off.

Liquidity

High-liquidity investments are easy to convert into cash you can use. You should avoid investing unless you’re confident that you won’t need to cash out before maturity.

Suitable investment options for business owners

Here are some of the top investment options for business owners:

Cryptocurrency

Admittedly, cryptocurrencies are volatile. This means they’re associated with moderate to high risk. However, they can earn serious value in very little time. Business owners that can accept the risk level with a portion of their profit can see significant returns on the investment. OKEx is a cryptocurrency exchange that allows business owners to quickly buy and sell crypto assets like Bitcoin. This is also a very liquid asset which is great if you need to convert the asset to cash quickly.

Certificates of deposit

Banks offer premiums to investors in exchange for holding lump sums of cash for a set length of time. Although interest rates are low, CDs are highly secure.

Treasury notes and bills

The U.S. Department of the Treasury offers Treasury bills and notes. Bills last for three, six, or 12 months. Notes last two, three, five, seven, or 10 years. With reliable payout dates, Treasury-backed securities might be ideal for your business.

Sweep accounts

These bank accounts combine money market accounts and checking accounts, helping you earn additional interest with your cash surplus. They automatically invest any balance over their required minimum balances, offering a no-worry investment option.

About Matt Shealy

Matt Shealy is President of www.chamberofcommerce.com

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