Finance 16 August 2018

How small business owners can generate a return from commercial savings

commercial savings
Small business owners need to be clear about their financial goals

Businesses are being offered little by way of interest for their deposits by Britain’s banks, with interest rates at very low levels. Business’ that have money set aside for a rainy day could be generating a better return. Graham Martin, chief investment officer at BondMason, looks at the options. 

Low interest rates coupled with inflation have eroded Britain savings. For instance, as many as three million small businesses are not earning any interest on their cash, according to research from specialist bank Aldermore.

To illustrate, the past five years of low cash returns may have cost a business around £1,225 in real terms for every £10,000 held during this period.

Here we look at alternatives for businesses’ looking to generate a return from surplus funds while also keeping an eye on the risks.

  1. Bank deposit accounts

If keeping savings for a short term need a bank account may still be the best option but offer poor returns.

Even for deposit or notice accounts interest rates remain low and that means good deals are hard to come by on the high street.  It costs banks significantly more to borrow in the wholesale or capital markets than it does to borrow from its retail customers, but they remain reluctant to acknowledge this in the rates they pay for deposits.

Also, bear in mind that for those fortunate enough to have over £85,000 in a bank there is no shield provided by the FSCS regulator’s protection scheme and this protection is not available to all limited companies.

  1. Fixed term bonds

Fixed term bonds, also called fixed rate bonds, are longer term debt obligations that usually come with a predetermined interest rate.

Bonds will typically offer higher rates of return than a bank.  Investing generally involves giving up access to your money during the term of the bond, which are typically sold on one, three, or five-year time scales.

Some bonds may have a secondary market where they can be bought and sold but prices will be determined with reference to a number of factors including prevailing interests rates, the credit worthiness of the issuer and general supply and demand and may realise a lower price than the bonds were purchased at.

For bonds without secondary markets the issuer may offer to repurchase the bonds early but there may be a penalty for doing so and there is also a risk that if the bond issuer becomes insolvent before the end of the agreement that you may well lose some of your money.

  1. Stocks and shares

A business may consider investing in shares in other companies and tracker funds, just as private investors can, to generate a better return.  While the overall direction of developed stock markets is a rise in value over the long term, this is punctuated by unpredictable falls.

So if you are in the position of having money in your business you want to hold for the long term, or maybe you simply like to speculate, then this is an option.  But for most businesses who want to protect the value of their savings while getting a better return in the meantime, stocks and shares are not a great option.

Holding shares in other companies can also cause accounting and conflict of interest considerations which need to be managed.

  1. Peer-to-peer market

Peer-to-peer lending, also referred to as direct lending, can potentially deliver relatively stable returns of around 6 to 8%+ per year and is may be worth considering for a proportion of surplus funds.

This market is diverse and growing and includes areas such as lending to inventors and start-ups, property investors and developers and to SMEs using their invoices as collateral. Essentially money is channelled through a specialist platform that lends that money to borrowers.

For instance, BondMason invests through over 33 such platforms, having carried out thorough reviews and due diligence on over 80. There are more launching all the time, so make sure you do your research.

The importance of diversification

No single investment can be relied upon to produce safe, reliable and consistent returns. By spreading and diversifying investments, it is possible reduce volatility, but not to eliminate risk entirely.

Investments may be regulated or unregulated.  Unregulated investments include most property classes and business to business lending.  For those looking for a combination of higher returns and understand and can manage the risks then there are plenty of unregulated investments from established and trustworthy providers worth considering as part of your portfolio.

To help mitigate the impact of inflation on your business’s money its worth taking time to consider some of the wide variety of investment options on offer.

Graham Martin is chief investment officer at BondMason, investment specialists in the direct lending market

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