Potential growth for the educated investor
Most small and mid-sized business owners spend more time worrying about bringing in investments and additional funding than thinking about what to do with earnings and profits. A majority of small businesses leave excess cash in the bank at default interest rates. Bank interest rates vary from 1% to 4%, depending on the type of account. The same money, invested in a diversified portfolio, may provide higher yields. If you have $150,000 in your business account, the bank rate will provide approximately $5000 per annum at the most, while investment would bring in around $15,000 to $20,000.
As an example, let’s consider that you acquire funding worth $500,000 for your small business, and you haven’t used up all of it. Some of it has been parked into your bank for the next stage, or contingencies. By investing the parked capital, you may be able to balance the interest and/or installments payable on the full amount of borrowings using the earnings from investing a part of the capital.
However, managing to work out this arrangement in a satisfactory manner is far from easy. For starters, very few funding organizations will let you use loaned amounts in any manner you prefer. The best way to do this would be to find a private company or individual willing to invest in your business with certain expectations of profit returns, but with minimal involvement in the usage of funds or day to day operations of the business.
Once you manage to acquire the funding, there remains the question of how to set up an above average performing investment portfolio. With the economy and markets in a volatile state and your valuable time focused on running the business, you need a portfolio which is relatively safe and needs less daily monitoring or tweaking. Recommended investment strategies include buying into a mix of index traded funds and treasury bonds for a significant part of the excess capital, and the remaining balance on high growth stocks, no-load mutual funds, ETFs and alternative investments.
If you can get this balance right, you would end up with a portfolio which provides stable and safe returns on a significant portion of the principal, and huge returns with slightly more risk from the rest of the investment amount. Using this kind of investment strategy, it is relatively easy to achieve stable returns of 13% or above. This level of earnings is more than sufficient to pay off the installments or necessary profit margins on the full amount to your lenders.
You are advised to consult your financial planner for advice regarding acquiring business funding capital under conditions favorable to you, and a trusted advisor to guide you regarding investments and building a diversified portfolio with business funds.
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