Investing your surplus cash as a business requires careful thought and planning. As an individual investor you alone shoulder the responsibility for your investment decisions, but when investing for your business, shareholders, directors and employees rely on management to make prudent decisions on behalf of the whole company.
So what do you need to consider when investing your surplus business cash?
Determine how much you can invest
Only invest surplus cash – never risk tying up money for the long term that you may need to support the day to day operations of the business. A thorough analysis of your cash flow forecast will help you better understand how much you have available to invest.
There will be many factors to consider when determining how much cash your business can invest:
- Upcoming payments you need to make
- Dividends to be paid
- Money you will need to retain in the company
- Additional expenses your business may encounter
- VAT, PAYE and corporation tax
Keeping this is mind will give you a clearer picture of how much you can invest and when. Think about investing a small amount initially, especially if this is your first investment with a provider or in a specific asset class.
Compare the risk as well as the return
Recent cuts to the bank rate mean that businesses are earning very little, and in some cases being charged, for holding deposits with their bank. As a a result, many businesses are considering other investment options in order to avoid inflation eroding the purchasing power of their savings.
However it’s always important to weigh up the risks involved with any investment rather than being fixated on the return.
For example, the Financial Service Compensation Scheme (FSCS) guarantees bank deposits of up to £75,000 for small businesses, with an annual turnover of less than £1 million. Investing cash in peer to peer (P2P) does not carry the same absolute protection, but platforms may offer different ways to prevent losses. Some, for example, set aside a percentage of each borrower repayment to cover losses in a provision fund, so its important to understand what degree of protection these provide.
Diversification is another method used to minimise your risk. This involves spreading your investment across different opportunties, reducing the impact of a single underperforming investment. Platforms with a loss provision offer automatic diversification, as your exposure is across the whole portfolio, independent of your specific investments at a given point it time.
Read the fine print
Investments, like any financial product are governed by a set of terms and conditions, so always read these carefully. Fully understanding the control that you and the platform have will give you a clear idea of whether or not you want to invest.
So what should you look out for?
- If you had to withdraw your investment on short notice, can you do this and how easy is it? Whenever you invest, consider the length of the commitment you are making, as some investment choices may prevent you from releasing cash early if you want to liquidate your investment. This makes flexibility a desirable trait for many when choosing where to
- Are there additional fees? Some platforms attach a number of fees to their product, for example a 1% servicing fee may mean you are not earning the full AER* quoted. Additionally, an early repayment fee may be applied on some platforms if you are allowed to liquidate your investment early.
No matter what platform you invest on, there will always be an element of risk to your capital – this is why platforms offer higher returns than simply holding bank deposits. Therefore understanding how platforms mitigate risk and protect investor returns is crucial to your decision process.
NB: Your capital is at risk if you lend to businesses. Lending is not covered by the Financial Services Compensation Scheme.
* AER stands for “annual equivalent rate”. The AER assumes that you keep your money invested for a year, and reinvest interest.
By Greg Carter, founder at Growth Street