We all know a few people who own small limited companies or are self-employed. It’s a tricky business getting a fledgling company to reach the stage of being profitable. Generating too much cash may seem like a nice problem to have. But you just need to consider the effect of inflation, compounded with lost opportunities to see why sitting on cash is not a good business strategy.
Cash sitting in your business account?
There could be several reasons why your business is generating surplus cash. Whether it’s because your company is more profitable at specific times of the year, or you’re just setting up and have received capital through a fundraising round. Or perhaps you’ve sold an asset and have cash waiting to re-invest elsewhere.
After taking some as income plus dividends up to a point that is tax-efficient, usually around £40,000, it’s difficult to use the business cash remains without paying a huge tax bill. As a result, the company profits stack up and a large amount of cash is left sitting in the business account.
Whichever scenario describes you, having too much idle cash could result in missed opportunities.
Declining purchasing power of cash
Since the financial crisis, cash has returned 1% or less a year, consistently below the prevailing level of inflation.
This situation is expected to continue, with the Brexit negotiations keeping UK interest rates low and a weakened pound keeping inflation high. As a result, the purchasing power of cash is actually going backwards.
To put this into perspective, at the current rate of inflation, £10,000 held in cash today would be worth £7,500 in 10 years' time. Similarly, £100,000 will be worth £75,000. A £25,000 loss.
Many business owners don’t have time to look at the options, so instead they either do nothing or just take a big tax hit by withdrawing their profits. There is a better way.
What are the options?
Here are a few options for investing your extra cash. You'll need to consider your current business needs and goals for the future to determine which option(s) are suitable for your company.
Of the 4,000 people surveyed by YouGov, 27% said they believed property was the best way to outpace inflation. Investing in commercial property, such as offices, supermarkets and warehouses, can grow your money through rental income and growth in the value of the property you own, but this option is often illiquid - meaning it can be hard to sell if you need to access your money.
A company can purchase flats and houses for investment purposes and rent them out.
Interest rates are usually higher for limited companies compared to personal mortgages and tighter lending criteria. There are good opportunities available, but you’ll need to consider how much time you want to tie your money up for and the costs and leg-work involved.
Lending against property
Accessing returns from buy-to-let and direct property investing is harder than it once, with new tax and mortgage regulations, was. Lending provides an opportunity to earn a passive income from property, with attractive risk-adjusted returns. BondMason has achieved a stable and steady investment track record from a conservative loan portfolio - with an average LTV of 56% - secured against UK property.
Company Pension Contributions
Your company can make pension contributions directly into your pension fund whether it be a stakeholder SSAS scheme or a SIPP. A SSAS is a small occupational pension scheme, normally set up by the directors of a business that want more control over the investment decisions relating to their pensions. Either way, the money going into the pension is not taxed by corporation tax.
If you have no immediate plans to use the company’s cash you could invest it into fixed term bonds. Remember that once deposited the money is tied up for the whole period and there are normally penalties for wanting to withdraw the funds before the settlement date. The ISA eligible Absolute Return Bonds enable investors to target inflation-beating returns, tax free.
How BondMason can help you access returns from your company’s surplus cash
We make it easy for investors to target attractive returns from secured lending. Since 2015, our clients have achieved average gross returns of 8% p.a1, investing over £40M across 6,000 curated loan investments, with 85% secured against UK property.
Achieving attractive returns from lending is about minimising the downside risks. We conduct rigorous due diligence to select our lending partners and assess every loan opportunity to make it easy for clients to build a well-diversified portfolio.
Accessing your funds
With no tie-in, you can withdraw your funds when you choose and we pride ourselves on enabling you to access your money when you want it. We aim to fully liquidate funds within 24 to 48 hours*, which we have been able to do in 100% of cases to date.
The decision of what to invest in, requires time in research. The danger is that if you remain indecisive and hold onto too much cash, you could lose out on missed opportunities. Property lending is seen by many investors as the middle ground between the volatility of stock markets and the security of cash.
Get in touch with the BondMason team today to learn more: firstname.lastname@example.org or 01582 802000
Nothing in this article should be construed as advice. Your capital is at risk.