Banks have never been generous when it comes to the interest they pay on cash deposits by businesses, but many SMEs may be shocked at just how little they’re earning on their reserves currently.
The average rate on instant-access business savings accounts is just 0.05%, according to the Bank of England. That’s a puny 50p of interest a year per £1,000 of balance.
Notice accounts are barely higher, the latest deals from banks pay an average of 0.07%.
Against this unappealing backdrop, it makes sense for SMEs to consider investing their reserves in the stock market for the opportunity of higher returns.
And the good news is there are now low-cost, easy-to-use investment apps with products specifically designed to help time-poor small businesses make the most of the stock market.
Here then are some tips for SMEs looking to invest their surplus cash:
Know your limits
Decide how involved you want to be in managing your stock market investments. 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.
The hands-on DIY approach may be appropriate for some businesses, but it may also be a distraction or an unnecessary extra worry. Having an expert manage your investments can leave you to stay focused on your business.
Using a professional portfolio management service should also help you to find the right combination of investments for your business, as well as handle the day-to-day management of your portfolio.
Give it time
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 which you won’t need back anytime soon reduces the risk of having to cash out at a loss.
Diversify your investments
Just as it can be risky for your business to be over-reliant on one client, likewise it 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.
Think risk as well as reward
Invest at a level of risk that suits your business. How much risk can your business afford to take with its hard-earned surplus and how much risk does it want to take?
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 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 investment returns that your hard-earned reserves make.