If your business cash is just sitting in a bank account, chances are it’s not working as hard as it could be and might even be losing value over time thanks to inflation.
Now of course that doesn’t mean you should pile all of your business cash into the stock market.
The good news is getting more from your money doesn’t have to be an all-or-nothing approach, because different pots of cash can have different jobs. You just need to make sure you can truly identify what is spare cash and what isn’t, and then you can start putting your money to work.
Different types of business cash and what to do with it
Day to day cash and emergency funds
Day to day business cash is the money you use to keep the business running, like payroll, rent and other more routine expenses. Whereas emergency funds are there for the unexpected: a delayed client payment, a sudden expense or even a slowdown in business.
For essential spending money that you might need immediately, a business current account is usually the safest option, even if it’s paying measly returns.
The point here is that instant access matters more than returns for this pot of cash.
Short-to-medium term cash (3 months to 3 years)
This is cash that probably won’t be needed for tomorrow, next week or even for next month.
It might be earmarked for things like paying tax bills, buying equipment, hiring plans or expanding your office.
Ultimately it’s cash that’s probably not worth just keeping in a business current account.
Instead it could be working harder, offering potentially higher returns, with more chance of beating inflation.
This could be particularly useful for money you’re setting aside to pay tax, like VAT or corporation tax. Any extra return you get above a current account could help soften the blow of a hefty tax bill.
What are overnight rate exchange-traded funds (ETFs) and why do investors use them?
An overnight rate ETF is a type of fund that typically tracks the SONIA (Sterling Overnight Index Average) rate. SONIA reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors. In its true form the benchmark tracks the base interest rate by the Bank of England.
The current targeted return for these funds is 3.73%, in line with the Bank of England’s overnight interest rate benchmark.
Ultimately, they aim to give you a higher return than cash (like a regular current account), but without the ups and downs that come with investing in stocks.
However, although low risk, an overnight rate ETF isn’t a risk-free investment. There’s always the risk that you get back less than you invested.
“With higher interest rates and uncertain markets, Overnight Rate ETFs can be a smart place to hold short‑term cash without leaving potential returns on the table.”
Haneen Sakhi, Product Specialist, Xtrackers by DWS
Want to invest in overnight rate ETFs?
If you’re looking to make more of your business cash and to try and beat what your bank is paying you, then it could be worth investing in an overnight rate ETF like the Xtrackers GBP Overnight Rate Swap ETF.
This ETF aims to replicate the performance of the SONIA rate. SONIA stands for ‘Sterling Overnight index Average’, and is the average interest rate banks lend money to each other overnight.
The ETF is aimed at investors looking for a ‘safer’ place to keep their money with a little more growth than a traditional savings account might offer. It invests in very short‑term, high‑quality debt from governments and companies, making it less risky. This fund may appeal to investors who need their money to be relatively accessible and want to avoid the ups and downs of the stock market.
Medium-to-long term cash (3 years or longer)
If your business has money that it’s not planning to use in the next few years then it could be worth considering investing it in the stock market.
It has a higher chance of bringing in greater returns over the long term than cash and overnight rate ETFs, but will come with more ups and downs.
Generally the longer your time horizon the more risk you can take, for example investing more in stocks and less in bonds.
A sensible approach is to make sure you’re investing in a number of different types of investments, like stocks, bonds and commodities, but also in different parts of the world. This helps you diversify, meaning all your eggs aren’t in one basket. Doing this means no matter what markets do, you should hopefully have something working in your favour.
ETFs are a really easy, simple and low-cost way to invest in lots of different assets like stock and bonds, from all over the world. As they’re mainly designed to track the performance of an entire stock market or ‘index’, like the S&P 500 for example, they can help give you instant diversification.
Read our beginner’s guide to investing in ETFs
What about tax?
Tax is a very important part of the discussion when it comes to investing business cash.
Lots of directors choose to take the majority of their income from companies as dividends because it’s usually more tax efficient.
The general idea of investing via your company though is that rather than paying out profits in the form of dividends – and being subject to dividend tax – you can keep the cash inside the business and invest any business profits before paying dividend tax.
This doesn’t mean you pay no tax – you’ll have to take the cash out at some point. But because most people have lower incomes later in life, the eventual dividends will most likely be taxed at a lower dividend tax rate than you’d pay if you withdrew the cash today. So the tax isn’t avoided, it’s deferred until later on in life.
If you’re in the fortunate position of having already maxed out your pension allowance, investing through your business is especially useful. Because any contributions into your pension above the annual allowance are taxed at your income tax rate.
So if you’ve already maxed out your pension allowance but still want to invest tax efficiently, then doing so through your business can be a great option.
However, it’s important to consider the tax implications from a business point of view too.
HMRC will look at a company’s ‘trading’ and ‘non-trading’ activities, and whether they’re substantial or not. For example, overnight rate ETFs might be able to be considered as a ‘trading’ activity if they’re genuinely earmarked for trading purposes.
It means that if you’re considering investing business cash it’s worth getting professional tax advice to make sure you’re being as tax efficient as possible.
Ready to invest your business cash?
If you’re looking to invest in the stock market for the longer term and can handle the volatility that comes with stocks over cash and overnight rate ETFs, then you could consider a global stock market tracker.
The Invesco FTSE All-World ETF offers investors the opportunity to invest in a wide range of companies from across the globe, including both developed and emerging markets. It aims to mirror the performance of the FTSE All‑World index, providing diversified exposure to the world’s stock markets.
This ETF might appeal to those looking to spread their investment across different countries and sectors, potentially reducing risk while potentially benefiting from broad global market growth.
Important information
Capital at risk. The value of your investments may go down as well as up, and you may get back less than you invest. Past performance is not indicative of future performance.
ETF costs apply. Tax treatment depends on your personal circumstances and may change in future. If in doubt, you may wish to consult a professional adviser for guidance.