— January 24, 2018
Individual investors boost their incomes through investments all the time, whether they be stocks, bonds, or other securities. The same goes for large corporations who invest heavily in the stock market to generate additional income and increase their firm’s net worth.
But, what if we told you that investing in securities is not only limited to private individuals or large corporations? Small businesses have a wealth of benefit to gain from investing as well.
Although most small businesses are hesitant to invest their money in vehicles other than the business itself, this strategy may prove to be worthwhile in the long run.
Here are four reasons your small business should consider investing in securities:
1. Income for a rainy day
Every small business owner is familiar with economic downturn periods that leave their revenues dried out. For precisely these times, it is important to invest spare money in securities that have the potential to generate additional revenue streams during “slow” periods.
Instead of investing cash in typical business activities, securities such as bonds and stocks can provide steady income streams to create revenue while normal business activities fail to produce their usual income.
What’s more, there are many security types such as mutual funds, stocks, and bonds that are highly liquid, meaning you can sell your shares fairly quickly and use the profits for your business once the economic pace picks up again.
2. Cash Parking
There are many reasons your small business needs to have cash on hand. These include:
- For insurance providers who require cash to prove that your business can cover its deductibles.
- For banks who tend to inspect a business’s financial statements before they extend credit.
Whatever the reason may be, parking your business’s cash in a bank account is not always ideal. Especially when you consider the fact that the Federal Deposit Insurance Corporation only insures bank deposits for up to $ 250,000 per account holder per bank. This means that any funds in excess of that limit will disappear if your bank goes bankrupt.
Enter cash equivalents.
Cash equivalents represent a company’s highly liquid investments that can be converted into cash within a few days and used to pay any liabilities. With this type of investing, businesses can “park” their cash in liquid securities that also tend to offer higher returns. Win-win!
Some examples of commonly used cash equivalents are money market accounts and treasury bills. Money market accounts are similar to bank accounts, although they offer slightly higher interest rates. While treasury bills are periodically sold government debt issues that can be resold at any time by the company, making them useful as cash-equivalents.
3. Investing spare change
In contrast to creating income for a rainy day, sometimes your business goes through “sunny” days where you accumulate a surplus of cash. Most businesses use this extra income for developing new products or services or expanding into a new market. However, an alternative strategy is to use surplus cash for investing in speculative securities such as high-yield stocks or bonds.
Since the cash used to invest is spare change, your business won’t suffer from the risk of the securities decreasing in value. And, the alternative possibility is generating extra money for your business in the case that the high-risk securities increase in value.
4. Minimizing the impact of recessions
Economic recessions usually affect specific industries more than others. For example, the housing industry is typically hit hard during most recessions because property sales drop, leaving real estate agents and developers without business.
To protect your business from inevitable economic downturns throughout the years, it’s wise to diversify your business’s holdings in order to minimize the impact of a recession. Especially, if your business operates within the sector that is hit hardest.
By investing some of your business’s assets in securities from other industries, you can successfully diversify your holdings and absorb the impact of a recession more effectively.
In the event of a national recession, purchasing a mutual fund with foreign securities or commodities such as oil or gold will also successfully hedge against the impact. What’s best about diversifying your firm’s investments is that fluctuations in your securities are not necessarily tied to fluctuations in your sales or value of your fixed assets.
While these four reasons are legitimate business concerns, investing in the stock market as a small business should only be done once all factors are taken into consideration. Some entrepreneurs may be at the beginning of their journey and too busy with their business’s day-to-day operations to be able to devote time to investing intelligently. If this is your case, revisit the idea at a later time, once your business is more stable and ready for outside stimulation.