I think that most of the successful businesses face the dilemma sooner or later, what to do with the company’s free funds? This question is especially relevant at the moment, when the global economic situation is not clear. As a result, some businesses hesitate to make decisions to invest in new equipment or expansion and keep company funds in bank accounts waiting for better times. However, it is not news that this money depreciates in the long run due to inflation.
We will discuss several methods that can help companies recruit free funds. However, I would recommend that before choosing one or another path, you should not forget to evaluate the need for liquidity of free funds and the return criteria. It is important to know that generally the higher the return, the higher the risk, including the liquidity risk of the investment.
Investing in real estate
When a business invests in real estate, it becomes possible to receive stable rental income. Also, the increasing value of the property can bring high returns in the future. However, in order to correctly choose a real estate object, a business needs not only to understand the current trends in the real estate market, but also to anticipate future changes. For example, some commercial properties in the city center or elsewhere may be attractive because of the prospects for continued income and growth in value they generate. The wrong choice – a poor investment – can backfire in the long run. As a result, investing in real estate requires a responsible assessment of prospects, risks and liquidity. It should also be borne in mind that property maintenance, taxes, and market fluctuations are inseparable when investing in real estate. According to experts, commercial real estate has a higher payback return, but lower liquidity than residential real estate.
Bonds
Investing in bonds is another way companies can employ their free funds. Bonds issued by both governments and private companies allow investors to earn interest. Investment risk can vary greatly depending on who the bond issuer is. In the case of government bonds, the risk will be minimal, but it increases significantly when investing in corporate bonds. Corporate bonds can be secured by property, but are usually unsecured.
Those considering buying bonds should consider that some bonds can be redeemed after 2, and others even after 10 or more years. There are bonds that, if selected, pay the accumulated interest every six months or annually, but there are also those where the accumulated interest is paid only after the full maturity date. Currently, bonds can yield from 6 up to 15 percent annual returns.
Interest on funds in the bank account
This investment method is particularly suitable for companies that value financial security and liquidity. In Lithuania up to 100 thousand. The money kept in the Eur bank current account is insured, allowing the business to freely dispose of funds for daily needs, but additionally provides the opportunity to earn interest on the balance of the bank account.
Before choosing this investment tool, you should do your homework and look into the conditions of banks and credit unions, because there are many different offers on the market. For example, some banks offer attractive interest rates, but only for relatively solid account balances, such as, for example, 0.5 million. Eur, when other banks offer attractive terms from significantly smaller balances, say 3 percent from 50 thousand balance of EUR.
A business can lose significant amounts every year due to inflation just by keeping money in a bank account. Deploying spare funds could not only offset inflation but also provide additional returns. Each investment tool has its own advantages and risks. It is important to understand that there is no one-size-fits-all solution for all businesses. Each choice should be evaluated taking into account the specifics of the company, financial situation, market dynamics and long-term goals.
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