As a small business owner, managing cash flow efficiently while saving for future expenses is crucial for sustaining and growing your enterprise. While traditional savings accounts offer minimal interest rates, certificates can be an innovative tool to maximize returns without assuming significant risks. This blog will explore various certificate strategies for small business owners. These tailored strategies are aimed at helping optimize cash management, save for future needs, and earn interest effectively.
Understanding Certificates
Certificates are financial products offered by credit unions and banks. Certificates usually offer higher interest rates than regular savings accounts in exchange for locking funds for a fixed period. Terms can range from a few months to several years. While withdrawing funds before maturity may incur penalties, certificates are generally considered low-risk investments. For this reason, certificates are a good option for small business owners looking to balance liquidity and returns.
Tailored Strategies for Small Business Owners
- Ladder Approach to Certificates: Implementing a certificate ladder involves dividing your savings into multiple certificates with staggered maturity dates. For instance, you could invest in certificates with three-month, six-month, one-year, and two-year terms. As each certificate matures, you can reinvest the principal and interest into a new certificate with the longest term. Importantly, this strategy ensures a steady stream of liquidity while optimizing returns through higher interest rates on longer-term certificates. In addition, laddering enables you to take advantage of interest rate increases as your certificates mature.
- The Barbell Approach: The barbell approach to investing in certificates includes investing in two certificates—a short-term certificate and a long-term certificate. This method enables you to maximize returns by selecting certificates with higher rates while still keeping a portion of your funds accessible via a short-term certificate.
- Certificate Bullet Approach: A certificate bullet is a great way to save for a significant expense, such as a new piece of equipment or a business expansion. With the bullet, you invest in certificates of different terms, all with the same or similar maturing dates. This approach lets you save gradually over time for a specific financial goal.
- Strategic Timing: Assess your business’s cash flow patterns and anticipated future expenses to strategically time your certificate investments. For example, if you expect a surplus of costs during a particular season, consider investing in certificates with corresponding maturity dates to coincide with anticipated expenses. You may also be focused on timing your certificates to take advantage of specific investment opportunities.
- Asset Diversification: Diversifying your assets across different investments can help mitigate risk and maximize returns. For instance, you may opt to use some funds for higher-risk investments like stocks or real estate, and then choose to protect other funds by investing in certificates. Certificates are low-risk, interest-earning assets that are reliable investments, especially in uncertain times like economic downturns or market volatility.
Benefits of Certificate Strategies for Small Business Owners
- Stable Returns: Certificates offer predictable returns with fixed interest rates, providing small business owners with a stable source of income to support operational expenses or future investments.
- Risk Mitigation: Compared to higher-risk investment options, certificates are relatively low-risk, making them suitable for small business owners looking to preserve capital while earning competitive returns. However, it’s important to note that if you need to withdraw your funds before the certificate matures, you may incur penalties. These penalties can vary depending on the financial institution and the terms of your certificate, so it’s crucial to understand these terms before investing.
- Cash Flow Management: By strategically timing certificate investments and utilizing ladder or tiered approaches, small business owners can manage cash flow fluctuations while maximizing returns on surplus funds.
- Future Planning: Certificates provide a structured savings vehicle for small business owners to save for future expenses, such as equipment upgrades, expansion initiatives, or unforeseen emergencies, ensuring financial stability and resilience.
- An Investment in Community: Instead of investing all of your funds with a national out-of-town company, investing in certificates at your local credit union helps you keep your money in the local economy. Credit Unions like Benchmark provide many community benefits, including competitive rates on twelve-month certificates as well as three and six-month certificates. By investing locally, small business owners can feel a sense of belonging and support, knowing that their investments are contributing to the growth and prosperity of their community.
Key Certificate Strategies for Small Business Takeaways
Certificates offer small business owners a versatile tool for managing cash flow, saving for future needs, and earning competitive interest rates without assuming significant risks. Small business owners can optimize returns while maintaining flexibility and liquidity, empowering them to adapt their financial strategies as needed. By implementing tailored certificate strategies, such as laddering, strategic timing, and diversified investments, small business owners can take control of their financial future. As mentioned above, penalties may apply for early withdrawals from certificates. With careful management and the right financial partner, certificates can play a vital role in supporting small businesses’ long-term success and sustainability.
Learn more in Benchmark’s blog, “Laddering Certificates: A Dynamic Approach to Combat Inflation.”
Disclaimer
The information on this website is provided for general informational purposes only and is not intended as financial advice or a recommendation. It should not be relied upon for making financial decisions. We strongly advise consulting with a professional financial advisor before taking any action based on this content. We do not guarantee the accuracy, completeness, or usefulness of this information and will not be liable for any loss or damage resulting from your reliance on it. Use of this site constitutes acceptance of this disclaimer.