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What Investment Options Do Businesses Have?

What Investment Options Do Businesses Have?
  • Opening Intro -

    When companies have a steady cash flow, they have to decide what to do with it.

    Some money will be needed for the near future in the next 3-6 months, other earnings within a 12-month period and some funds will become retained earnings and can be an investment for long-term gain.

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Here are a few investment options open to businesses.

Money Market Funds

Keeping cash in business checking accounts provides little or no interest return. Some banks will allow overnight transfer to a treasury fund or a money market account that pays a low rate of return for providing access to the capital for a 12+ hour period when the typical company doesn’t require access to all its funds.

The money market rate for short-term holdings is very low, usually under 1% annualized, but it’s still better than leaving a large balance overnight that’s paying zero.

Short-term Bond Funds

Short-term bond index funds and actively managed funds allow business investors to buy institution level allocations. The investment fees are far lower than for individual

The duration of the investment funds varies from a few months to five years in most situation. The lower duration puts the capital less at risk from internet rate movements where a 100-basis point (one percentage) move up in interest rates causes a roughly one percent decrease in the value of the bond fund related to its yearly duration. To clarify, a three-year bond duration fund may lose three percent when interest rates move up one percent. The shorter the duration, the lower the risk and the smaller return. It’s all a trade-off.

Equity Index Funds

Equity index funds from the likes of Vanguard and Schwab provide low-cost access to the stock market indices where the underlying fund buys a relative portion of every stock. There is some sampling involved to try to match the fund return with the index it is tracking, like the S&P 500 index or the Russell 3000 index.

There are sometimes redemption fees based on the holding period which incentivizes investors to not sell too quickly. The income potential is fairly low – 2-3 percent per year – and won’t boost cash flow by much. There are discounted fees based on the fund classification with institutional investors and pension funds getting the best deals.

Dividend Income Funds

The market for dividend income funds, actively managed funds, and individual stock picking is popular currently. The idea here is that historically companies that buy back their shares and pay a higher income tend to be fiscally more responsible. Retained earnings are not squandered on the CEO’s pet projects, most of which never pan out. Therefore, while the theoretical growth with high dividend payers is slower, the higher cash dividend payments make the total return very acceptable.

For a detailed view of the advantages of dividend income stocks and funds, check out dividendmantra.com which was one of the first websites to feature a detailed analysis of this section of the listed marketplace.

There are many investment options open to businesses with extra cash to spare. The key issues are determining what working capital should be left in place, whether money will be needed within a handful of months for expansion purposes, and what is likely to be retained earnings and can be invested for long-term gain.

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