As an entrepreneur, you know you must take certain risks when investing in your business. But you also know that every penny counts. So, what types of investments can you make as a small business owner that meet both requirements?
To be a successful business owner, it is key that you learn how to invest (in materials, renovations or salaries, just to name a few) to be more productive, profitable, and competitive.
But, how can you maximize your return on investment?
How can you choose the best investments for small businesses?
In this post, you can learn about the most common (and profitable) types of investments for small businesses.
What Are the Most Common Types of Investments for Small Businesses?
If you intend to invest in your business for long-term growth, you have many options and you must weigh them carefully. These are the most common:
1. Stock market
This is one of the most common types of investments for small businesses. Companies divide the business property into a number of shares, which are sold for profit. Here you can see how the stock market works. When you buy a share in the stock market, you are investing in a small part of the profits and assets of a specific company.
|Pros||As an investor, you can buy and sell shares of different companies. If the value of the shares goes up, you can sell them and make a profit. In some cases, companies distribute dividends (a part of the profits that some companies periodically pay to their investors.)|
|Cons||Investing in the stock market carries a risk: if the activity of the company of your choice drops, those actions lose value. And if that company goes bankrupt, you will lose all your investment.|
A bond is a fixed-income type of investment. It consists of a loan you make to the issuer of that bond (a company or the government) in exchange for regular payments in the form of interest. The invested capital is amortized on the expiration date of the bond.
|Pros||They are usually considered to be lower risk than stocks. Similarly, state or city bonds are often considered safer than corporate bonds.|
|Cons||They imply a smaller return and they offer less interest in exchange for the money.|
3. Managed Funds
Funds are common reserves of capital that are established for a specific purpose. They are usually managed and invested by professionals.
A business owner can also invest in funds to obtain a return. They have the advantage of giving you access to a large number of investments through a single transaction.
These are the main types of investments for small businesses that funds involve:
- Investment funds: They collect money from investors and invest it in a diversified portfolio of stocks, bonds or other assets. If the fund makes money, you can distribute a portion of that money among the investors. If the fund increases its value, investors can sell their stake in the fund and earn money. To invest, an annual expense rate must be paid.
- Indexed funds: It is a type of investment fund that follows a benchmark stock index (the Standard & Poor’s 500 index): instead of paying a manager who decides on the investments, there is a portfolio of shares from companies participating in the mentioned index. These funds may increase in value when the index increases its value. Indexed funds involve fewer expenses than investment funds.
- Exchange-Traded Funds (ETF): This is an indexed fund type. But the key difference between an ETF and an index fund is that throughout the day you can buy and sell ETFs as if they were a share. In other words, the price of the ETF varies throughout the day, while on the other hand, investment funds or indexed funds are quoted only once at the end of the day, regardless of the time at which the investor buys. They can be very useful for small investors since they allow you to diversify your investment at a low cost.
|Pros||Your investment is managed by an expert with the knowledge that’ll help them get a great ROI. The diversification of managed funds translates as reduced risk.|
|Cons||The returns you receive will be taxed, plus the fund will charge you management and withdrawal fees.|
4. Banking products
- Certificates of deposit (CODs): They are issued by banks and credit unions, offering an interest if the investor doesn’t use the money in the COD for a certain period time, and vice-versa: there are penalties for withdrawing the money before the end of the term. There is a great variety of CODs from traditional and online banks, offering different interest rates, terms, etc.
- Savings accounts: There are high-performance savings accounts designed for future emergencies or an expensive purchase planned also in the future. They are usually offered by institutions other than banks with physical branches, which may imply higher expenses.
|Pros||Unlike stocks and bonds, they are safer investments and guarantee a return. They offer interest rates above inflation.|
|Cons||If you need to access the money, there are penalties for early withdrawal. You also have to pay special attention to commissions, charges, and requirements. Depending on those, you could even end up losing your money.|
Related reading: Why should you have a business savings account.
An option is a contract that reflects the fixed price to buy or sell a share on a specific date. When you buy the contract, you buy the option, not the share. The option does not force you to buy or sell the share on the date agreed. You can buy or sell the shares on that date, sell the contract to another investor or let it expire without buying or selling. Options can be complex but basically, they consist of blocking the price of a stock that you expect to increase in value. If your prediction fails and the option is not bought or sold, you only have to deal with the cost of the contract.
|Pros||They’re very cost-effective, have low risk and yield high returns.|
|Cons||They don’t have as much liquidity, are more expensive than other trading options, and have time decay (the value decreases in the underlying).|
If you are unsure about investing in stocks or options, read this post to find out which of the two options is better for you.
6. Retirement Plans – 401(k) Accounts
The so-called 401(k) plans take their name from the US Internal Revenue Code. A 401(k) plan is a retirement account offered by employers to their workers, which implies tax advantages and contributions.
Contributions to the accounts can be made by employees through automatic withholdings on their payrolls. On their side, employers can match all or some of those contributions.
There are basically two types of 401(k)s: traditional and Roth. Their main difference is the way they approach taxes.
|Pros||In a traditional 401(k), the employees’ contributions lower the income taxes for that year. With a Roth, employees make after-tax contributions and can make tax-free withdrawals.|
|Cons||Withdrawing money (usually after retirement) is subject to taxes.|
This type of financial product is basically a form of insurance: the investor pays a premium to obtain a return in the future. You can find these types of annuities:
- Fixed annuities: By paying a premium, you receive a fixed amount after a certain period of time.
- Variable annuities: They allow you to choose investment options for the premium paid.
- Indexed annuities: They guarantee minimum interest payments and follow a stock index such as the S&P 500.
|Pros||A fixed payment is received, which can be an annuity until the investor or the investor and their spouse decease. Beneficiaries can also be added to the plan.|
|Cons||With a wide range of different models, quantities and payment terms, they can be quite complex and hard to understand. In addition, inflation may reduce their value over time. Finally, the investor has virtually no decision power in the investments.|
Cryptocurrency is a form of virtual payment that can be exchanged online for goods and services. There are companies that issue their own currencies to be used to purchase their goods or services. They are usually called “chips.”
You can get chips in exchange for dollars or other cryptocurrencies. The purchase is made through a platform where you can exchange real money for cryptocurrencies. There are many of these exchange markets, where it is possible to buy and sell them cryptocurrency. For tax purposes, they are considered “property”, not currency.
|Pros||Cryptocurrencies use Blockchain technology, which makes them safe (although some experts disagree on this point). If those who own cryptocurrency think that their value will increase in the future, they may opt to stop using them as currency and therefore consider them an investment.|
|Cons||To make a profit, someone has to pay more for the cryptocurrency than the initial investor. In addition, there has been great volatility in the price in recent years.|
Camino Financial: Invest in Your Business Safely and Sustainably
We hope this reading has helped you better understand what types of investments for small businesses you can make and all your options. Now that you have this information, maybe you would like to invest in your business growth and increase your profitability, but you don’t have enough capital to proceed with any of the types of investments for small businesses explained above.
Do not be discouraged! You have an alternative at your fingertips.
In Camino Financial, we are loyal to our motto “No Business Left Behind.” And yours is no exception.
What benefits will you get by choosing us? Our loan specialists will help you:
- Get the best financing option with the best possible interest rates that allows you to repay your loan comfortably, with monthly and fixed payments, and therefore with no surprises.
- Increase your profits and make your business grow since you can use the funds of our loans for the purpose you choose: increase your cash flow, improve or expand your business, buy equipment or inventory, hire staff, invest in marketing, etc.
- Make the most of your money: we’ll make sure you get the maximum return on the investment you made through your business loan.
We provide loans of up to $400,000 to small business owners. Do you want to know if you prequalify for one of our loans? Request a quote now to receive instantly an answer.