As your small business grows, you may soon find yourself in the beneficial position of making a profit! With employees paid, short-term debts repaid, taxes out the door, and inventory restocked, it may be time to start looking into business investment strategies that will help to grow your business’ net worth. While diving into financial investments can be daunting enough when it’s your personal funds, investing your business’ funds can be even more intimidating. To get you started, we’ve outlined some of the best investment strategies for small business owners who want more options for expanding their capital.
Start with These Business Investment Strategies
1. Build an Emergency Fund — The same advice that’s given for managing your personal finances applies to business finances as well. Your best investment as a small business owner is ensuring that your company has emergency savings in place. An emergency fund can prepare you for an unexpected slow season, the loss of a large client, or an extreme uptick in the cost of supplies. It’s recommended that you have enough savings on hand to cover at least six months of business expenses. This will allow your company to operate under the status quo until your unforeseen situation stabilizes. High-yield business money market and business share certificate accounts are great investment tools for your emergency fund.
2. Determine Your Risk Tolerance — How long your company has been in business, the volatility of your industry, how close you are to retirement, and overall economic conditions will all play a role in how risky you’ll be with your business investment strategies. Small business investors often find that mutual funds and exchange-traded funds provide the right balance of risk because these large funds are made up of hundreds of stocks of differing risk levels. This is also referred to as an asset allocation model of investing.
3. Choose Passive or Active Management — As a small business owner, you may already be wearing a lot of hats. You’ll need to determine if the role of Investment Manager is one you are ready to play. An active management approach will be necessary if you choose hands-on investment strategies like real estate investments or researching and buying/selling stocks on your own. On the other hand, passive strategies include investment vehicles like mutual funds, CDs, and annuity accounts that operate without much involvement on your behalf.
4. Explore Dollar-Cost Averaging — Although the name sounds complex, this is actually an easy strategy to start investing on a small scale. This business investment strategy allows you to choose a fixed amount of money that is put into your chosen investments at regular intervals over a long period of time. As the market moves up and down, your fixed dollar amount will be able to buy more shares some months and fewer shares other months.
5. Rebalance Your Portfolio — As your investments grow, your business goals realign, and your risk profile changes, it will be necessary to reevaluate and rebalance your investment portfolio. If you find that your investments need more diversification, you can rebalance your assets.
Understanding Business Investment Risk
No matter how low your risk profile is, all investment comes with the potential for loss. Here are some of the risk factors you should be aware of before you begin investing your small business funds.
- Inflation Risk — When the inflation rate rises, the money in your investment accounts won’t have as much purchase power when it’s cashed out.
- Interest Rate Risk — When interest rates fall, fixed income investments (such as bonds or mutual funds) can lose value.
- Systematic Risk — This risk is associated with stock market volatility and the typical increases and decreases in stock prices.
- Unsystematic Risk — This relates to issuers of individual stocks or other investments going bankrupt. This risk can be mitigated through diversification and ensuring your investments have certain protection from losses, either from the FDIC or IGA (Insurance Guaranty Association).
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