Businesses invest in securities for a variety of reasons that help them protect the company and improve their balance sheets. Understanding why businesses invest in these assets will help you determine if and when you want to put your company’s money into securities.
What are Securities?
Securities are financial instruments such as stocks, bonds, certificates of deposit and a variety of other paper-based assets, explains financial website TheStreet. The list of securities in which you can invest is longer, but these are basic investment instruments a small business might use to improve its finances.
Securities Provide Better Returns
One reason corporations buy securities is that these assets can provide a better return than simply keeping your money in an operating account with your local bank, which might earn little or no interest. The greater the risk of the investment, the greater the potential return, points out financial advisors, Camino Financial.
You’ll need to decide how much you can afford to lose if you invest your company’s money in securities. Working with your accountant, tax advisor or a financial advisor, you can create a proactive investing strategy to increase your business income. You might even set up a business investment account.
Securities Offer Diversification
Corporations that invest in securities spread their assets around to avoid taking a hit on all of their capital if it’s tied up in one place and something happens to it. Businesses also use securities to look for new money-making opportunities. For example, during the first year of the COVID-19 pandemic, many small businesses saw their sales plummet, while the stock market soared. Businesses that invested their excess cash were able to offset some or all of their operating losses with investments in securities.
Investing also allows companies to take advantage of attractive market opportunities to increase their balance sheet. A stronger balance sheet makes your business more attractive to potential buyers or investors.
Some Securities are Tax-Advantaged
Some investments can help you reduce your tax burden, based on how you handle your capital gains. For example, money that you earn from sales is considered income by the IRS. Money that you earn from non-sales sources, such as investment, are classified as receipts.
Gross receipts are taxed differently than sales income. They are often a target of politicians who want to raise federal tax collections, according to The Tax Foundation, so you’ll need to be careful if you’re looking at increasing gross receipts as a long-term strategy for your small business. Talk to a tax advisor about reinvesting your gains or other strategies that can reduce your income tax.
Factors to Consider Before Investing
Before investing in securities, look at how much excess cash you have, how much you need to keep on hand to operate and to meet emergencies, and how much that cash is earning. If you have more cash than you need to operate and create an emergency fund, and you’re making little or no money on this extra cash, consider investing.
Take into consideration your access to credit, which can allow you increase more of your cash while still keeping a source of capital on hand to pay your bills. Remember, however, that the interest on credit, especially on credit cards, can be much higher than a security you own.
