Once your business is up and running successfully, it’s inevitable that the positive cash flow will build up some reserves for your company. While keeping a solid chunk of money available to meet expenses is necessary, hoarding excessive amounts can get out of hand and cost you revenue.
In this article, we’ll discuss whether or not you should invest your business cash in 2022, what the advantages and disadvantages are and where to invest the money in the first place. Have fun reading!
Advantages & disadvantages of corporate investing
When you decide to get into corporate investing and put the money you earned with your business to work, there are both advantages and disadvantages to this. In the following section, we want to go deeper into some pros and cons of investing your business cash, so you can decide if it’s ultimately useful for you in your current situation.
Advantages
One of the biggest advantages to investing cash you have acquired through your business is that it stays in the business, and therefore you don’t need to pay dividend tax on it. In most countries of the world, if you distribute the cash to the shareholders as dividends or pay it out to the owner as a salary, there’s a hefty tax on it.
If all the owner wants to do is invest the money anyway, it can be more advisable to forgo the distribution of the funds and let it stay in the business. That way the money can accumulate much faster because the initial amount you can invest is higher than if you would have to pay taxes first.
Also, there might be taxes on capital gains, which are applied to personal gains but not to investments made through the company. So, that provides even more leverage to your finances.
Finally, it’s also worth to consider investing your business cash for the following reasons:
- Acquiring additional income streams for your business
- Diversifying the way your revenue is created
- Generating even more money to be reinvested in your business
- Growing your cash assets instead of leaving them on the bank account with zero to low-interest rates
Disadvantages
While the historic return rates of assets like stocks are at a yearly average of around 6 – 7 percent, there’s usually no certainty that this performance will be replicated every single year. This means that if you decide to put your business cash to work, it can happen that the prices of the assets you invested in dip and therefore leave a big red minus in your account.
Make sure you know how to handle that – one way to find out is our risk tolerance quiz! If going all-in with your money is not your thing (you should keep some cash reserves anyway), then adjusting the amount you invest can lead to you sleeping better at night.
Another time when corporate investing might not be at its best is when you need to quickly access your cash. This could be if there are some big planned investments you want to make in the future or your business is seasonal or unsteady, but you still need to pay rent as well as salary for your employees.
In these cases, it can make sense to hold off on investing for the moment to build up either more reliable income streams or bolster up your cash reserves to be equipped for everything life could throw at you.
Where to invest as a business?
Just as with your personal money, there are a plethora of options available to invest your business cash. It all depends on how involved you want to be in the investment, what’s your investment horizon, if you prefer certain sectors to others or want to make exclusions and what returns you aim to achieve.
Here’s a list of some potential ways to get started with corporate investing:
- Bonds are one of the most chosen assets for businesses looking to invest their money. If you pick government bonds like from the US or Germany, they are considered safe and are highly liquid. The interest rates are not so high, though.
- Stocks are not just available to individual investors, but also to companies. You can therefore decide to do some stock picking with your company capital. They can offer great returns yet also come with high volatility.
- Funds are for you if you’d like to participate in the stock market without the guesswork. There’s a multitude of different funds, like mutual funds, that are often managed by fund managers and have higher fees or index funds which intend to track a certain index and don’t use a fund manager.
- Commodities like gold, oil, metals or other physical items are also an option to invest in. Whether it makes sense to invest in precious metals like gold depends on what you’re expecting to achieve. They’re usually a good inflation hedge, but don’t create crazy returns.
Investing into P2P as a business – a closer look
Next to these more commonly known assets, there’s also the possibility to invest into P2P as a business. P2P loans can not only be good for your business during times of high inflation, but in general, make a good way to diversify your investment while generating good returns.
In a nutshell, P2P lending allows you to invest into loans issued by established loan originators and earn returns of average 12% while needing low capital requirements. Here’s more on what P2P lending is and how it can be used to your advantage.
Thanks to things like Auto-Invest which enables you to diversify your P2P loans on autopilot and a Buyback Guarantee that buys back outstanding loans, it’s an asset class that should definitely be on your radar!
Bottom line
If you have leftover cash in your business that you’ll certainly not need for any future investments and have a solid cash flow, it’s worth thinking about letting that money work for you. Be it only for the reason of it not depreciating year after year.
How to invest your business money is a topic of itself. There are numerous ways to do that, with some offering higher and others offering lower returns. One interesting asset class is P2P lending and platforms like Lendermarket, where you can invest your money into loans with Buyback Guarantee and earn an average annual return of 12%.