It takes time for a small and medium enterprise (SME) to get into a cash flush position. When that happens, it’s tempting to hang on to it to preserve the capital.
But as with personal finances, there are other avenues that will provide businesses with opportunities to grow their surplus cash. As Andrey Dobrynin, managing director at InvestEngine, explains: “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.”
So, how can you make the most of your surplus cash? Let’s take a look at six possible ways.
1. Invest in the stock market
It’s important to know that any type of investment carries risk. You will first need to understand your appetite for risk before embarking on a diversified investment portfolio.
Bear in mind that your business’s emergency savings shouldn’t be part of the capital invested and should rather be in a short-term, guaranteed savings account. The money that you invest should be funds that you can afford to lose and that you are happy to invest for at least 10 years. Have a look at our share dealing comparison page to see if there’s an option that suits your needs.
2. Expand your current SME operations
Diversification and expansion are popular ways to build the wealth of an SME. If it’s in the best interest of your business, you could use the surplus to introduce another product or service. Market research and feasibility tests should be carried out to ensure your current business operations don’t have to carry the next project, but the surplus could be enough to get it going.
3. Invest in another business
You could use your surplus money to help another business get off the ground. They need money and you need returns. However, hold up before you throw money into that microbrewery up the road because of the possibility of free beer.
It helps to rope in the help of a business consultant or broker to do due diligence. You want to know that the business is actually worth the percentage you’re buying.
4. Enter the property market
Commercial property has a lot of possibilities. In the first instance, it’s valuable to own the building your business operates from in order to control costs. You could also purchase property with the intention of leasing it to other SMEs. For instance, you could subdivide a large property in order for multiple businesses to operate.
5. Consider peer-to-peer lending
There are a number of peer-to-peer lending sites purposely designed for businesses to fund other businesses, especially startups. While this is a great way to generate a possible return, the risk is not any less than sourcing a business to invest in yourself.
On the plus side, your returns shouldn’t be dependent on any input or guidance from you. A business partner or shareholder should provide this service unless otherwise discussed.
6. Invest in bonds
Bonds have always been considered by investors as a ‘safer’ option for those who are averse to stock market investing. However, it’s important to know that while bonds tend to hold their value more than the stock market, there can still be losses.
For an SME, long-term investing in bonds might still be more lucrative than simply parking the funds indefinitely in that 0.05% business savings account.