With banks paying just 0.05% on business savings, SMEs have the opportunity to earn much higher returns by investing their surplus cash in the stock market, says Andrey Dobrynin, Managing Director at InvestEngine
With interest rates at all-time lows, keeping your business cash reserves in the bank could hardly be less rewarding.
According to Bank of England data, the average rate that banks are paying on instant-access business savings accounts is just 0.05% — a mere 50p of interest a year per £1,000 of balance. And notice-type savings accounts for businesses are similarly disappointing, with the latest deals from banks paying an average of 0.07%.
Just as individual savers are increasingly turning to the stock market in search of higher returns, investing can offer a rewarding way for businesses to get more from their surplus cash. And while much of the investment industry focuses on individual customers, the growth of investment apps has also seen the launch of products aimed at small businesses.
Of course, investing in the stock market involves risk. So, for businesses looking to start investing, here are some key dos and don’ts to consider:
Think long term
Over time, the stock market tends to outperform cash – but it’s important to remember you can also lose money, particularly over the short term.
By investing with a longer-term view, you give yourself more chance of seeing a good profit and beating cash. Likewise, only investing reserves that you won’t need back anytime soon reduces the risk of having to cash out at a loss.
Diversify
Just as it can be risky for your business to be over-reliant on one client, it similarly makes sense to spread your bets when you’re investing.
This means not having all your money in a single company’s shares, or even in one market or type of investment.
By having a well-diversified portfolio of investments, you’re cushioned from a fall in the value of a single holding, and over time, this strategy should deliver smoother returns.
Take the right amount of risk
Invest at a level of risk that suits your business. Consider capacity for risk and appetite for risk — how much risk your business can afford to take, as well as wants to take, with its hard-earned surplus.
Think about when your business might require access to the invested cash and the practical impact on its operations or stability that any losses could have. As well as the amount of risk that decision-makers in the business feel comfortable taking.
These considerations should be reflected in the choice of investments and the overall level of investment risk you take on, for example by balancing riskier shares with less risky bonds.
Keep costs down
Don’t overpay! The financial services sector has a bad reputation for high and opaque charges.
Paying too much in investment fees damages your returns. Higher charges won’t guarantee you higher performance, whatever anyone claims.
With lower fees, you get to keep more of the returns your investments make.
Getting started
If you think investing could be right for your business, you’ll also need to decide how involved you want to be in putting your money to work. Should you do it yourself or leave it to the experts?
DIY investing offers control and the freedom to choose your own shares and investments. However, not everyone has the time, interest or confidence to manage their own investments. That’s as true for small businesses as it is for individuals.
DIY investing may be appropriate for some businesses, but it may also be a distraction or an unnecessary extra worry. Having an expert manage your investments for you can help you stay focused on your business.
Using a professional portfolio management service should help you to find the right combination of investments for your business, as well as handle the day-to-day management of your portfolio.
These days, an easy-access investment solution needn’t cost the earth — and all you need is an app to start investing your business cash.
