Are the days of earning interest over? According to financial advisors the answer is yes. Small businesses with a chunk of cash to put away and who want to earn a little extra for being smart savers will be hard pressed to find those 4.5% and 5% perks of last year.
“2006 was the last time you could get a 5% yield for your money market,” says Cary Carbonaro, a certified financial planner. “Those times may come back, but not in the near future. There really is not much you can do with your cash if you’re a small business.”
Well, not without some time-paralyzing financial risks. Most companies can’t afford to take risks and tie money up for long stretches of time. “They want to put $10K in the bank and get back $10K with interest, but there is no where to safely put your money right now and get interest while keeping liquidity,” says Morris Armstrong, an investment advisor.
That need for daily liquidity is the caveat. With the traditional money market barely passing muster at a dinky 1% yield, few investment options are better.
Short bond funds are an opportunity Carbonaro recommends her small business clients. Despite the tragic outcome of the short bond fund during the financial meltdown last year, SBFs are the best bet. “Sure, they had a big run up last year, but this year not so much. They get a higher yield at just over 2%, and sometimes even 3 and 4%. Plus, you can put it away for whatever term.” Just make sure the fund you choose doesn’t have any in and out fees. Carbonaro says to ask for the non-transactional fund accounts.
The higher risk options then are treasuries and CDs. Not exactly an easy investment decision for companies that need that need immediate or short-term liquidity reminds Carbonaro. Treasuries score at best 2% and stay tied up for a year or two. To get an idea how pithy the returns are: 3 months awards .17% interest, 6 months .26%, 12 months .43%, 2 years 1.14%, 3 years 1.71%.
Although more characteristic of an individual investor vs. small business owners, those willing to risk five years of tying up money could look into bonds or CDs says Carbonaro. “Exchange trade funds lost 40% last year but they are still good option,” says Carbonaro. “Last year wasn’t a good time to invest in the short term. Now people are not as concerned about bank and company failures because [the economy is] stabilizing a bit.”
Still, getting less than 1% shouldn’t necessarily be scoffed at. Take Carbonaro’s big money client who deals with metal for example. “He has huge big ticket items and he pays for the material in full. But he holds the money -- sometimes over a million dollars -- for as long as he can to get that 1%. That is a nice amount of money to get a percent on.”
Besides traditional banking, Armstrong says the smarter place to invest money is via researched deals and discounts.
“Often when you order something as a business, the seller gives the option to pay sooner than later for a 1% discount. So if you have the money to pay right away, and maybe you’re willing to buy for the next few months for another percent off, you have a tremendous discount. 1% of the face value is 12% for the year. The can be several thousands of dollars in savings.”