How small business owners can generate a return from commercial savings
Small business owners need to be clear about their financial goals
Britain’s banks are offering little by way of returns to commercial savers with interest rates seemingly being kept in the doldrums. So how can small business owners keep their savings protected and generate a return? Graham Martin, chief investment officer at BondMason, looks at the options.
Low interest rates coupled with a decade of low inflation has eroded Britain savings. As many as three million small businesses are not earning interest on their commercial savings, research from specialist bank Aldermore found.
To put that in real terms, we’ve found that the past 10 years of low inflation could have cost your business around £1,930 for every £10,000 of cash it held in savings over that period.
Here we look at what options you could consider to make your business savings work for you.
Having a bank savings account can be convenient for short term commercial plans, but as a place for keeping pots of money for the medium and long-term bank accounts aren’t always the best option.
With bank deposits, typically, the higher the interest rates the more penalties you incur if you need to access your savings early. Some penalise by not paying out bonuses or taking away interest payments if you need to access your money early, others may make a reduced payment.
None offer a great deal, particularly if you consider this: a bank may borrow from the capital markets at a rate of 5%+, yet you are giving it the money almost for free.
Also, if you are fortunate enough to have over £85,000 in your bank, be aware that anything above this is not protected by the FSCS regulator’s protection scheme, and this protection is not available to all limited companies.
Fixed term bonds, also called fixed rate bonds, are longer term “debt papers” that usually come with a predetermined interest rate.
While it offers higher interest rates than bank accounts, investing in one may mean giving up access to your money during the term of the bond. In some instances, you may be able to sell the bonds before the end of their term, which is normally a one, three, or five-year time scales.
Accessing you money early may mean you incur penalties or you have to accept a lower price in secondary trade. There is also a risk that if the bind issuer becomes insolvent before the end of the agreement that you could loose some of your money.
Alternatively, you can invest some of your business savings in shares in other companies, just as private investors can.
Investing in stocks and shares is best viewed as a long-term strategy. The overall direction of developed stock markets is a rise in value over the long term, punctuated by unpredictable falls.
If you want a return of over 4% on your business’s savings, and don’t want to speculate on shares, then the “direct lending” market is an area to consider.
Peer-to-peer lending, also referred to as direct lending, can deliver stable returns generally of around 6 to 8%+ per year.
The market covers all sorts of areas, such as lending to inventors and start-ups, developers and to SMEs using their invoices as collateral. Essentially you invest your money into a platform that lends that money to borrowers.
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.
The importance of diversification
No single investment can be relied upon to produce safe, reliable and consistent returns.
The benefits of a diversified investment portfolio apply to direct lending in the same way as any other portfolio. Spreading your investment across different loan types, loan durations and grades is an effective way to target good returns over the long term.
Many investments are categorised as unregulated, including property and most peer-to-peer and direct lending.
For those looking for a good combination of higher returns and acceptable risk, then there are plenty of unregulated investments from established and trustworthy providers worth considering as part of your portfolio.
Small business owners need to consider their options carefully and be clear about your financial goals.
If you want to stop your commercial savings being eaten away, then you need to consider all the options on the market. While this involves a little bit of risk, this can be mitigated by a diversified approach and not having “all your eggs in one basket” and by spending time checking carefully.
Graham Martin is chief investment officer at BondMason, investment specialists in the direct lending market
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