Investing as a Business — Opportunities & Challenges
If you are a business owner and happen to be reading this article, then the odds are that you are looking for alternative revenue streams outside of your business, or are looking to implement investment vehicles within your business. Either way, you are looking to make additional income alongside the profit generated by your business.
One popular avenue for business owners is corporate investing, which is a way of putting your business's surplus cash into various different investment vehicles and assets. But as investments continue to evolve, business owners have to adapt to the changing landscape, and this can be tricky when you are running a full-time business.
This guide will therefore aim to save you time by presenting a crash course for investing in a business and will present some potential options that are currently available to you. But please note, that although the information that will be shared is meant to help, you should still conduct your own research, and go into this knowing that investing as a business still has risks.
In this article, you'll find out about:
- What is corporate investing
- The benefits of investing through a limited company
- Potential risks and disadvantages with corporate investing
- Types of investments a business should consider
What is Corporate Investing?
Put simply, corporate investing is when a company strategically puts its extra money into different investments and assets in order to increase its revenue outside of its main business. What this approach does is help businesses to increase their revenue streams, become less dependent on one’s main business, and can help improve the overall financial position and development of such companies as well.
Corporate investing, if done right, can potentially be a lucrative source of income, and also make your business much stronger. However, it is important to note that like any other speculative investment, there are also risks involved.
But first have a look at the benefits on offer.
The Benefits of Investing Through a Limited Company
The most common way businesses invest their spare capital is through a limited company, as this avenue offers an array of different benefits that can bring about both short-term and long-term financial gains. This route not only makes your tax more efficient but also provides a structured way to diversify and secure assets.
Below are some benefits of investing through a limited company.
- Efficient Tax Structure: Investing through a limited company is often more tax-efficient than investing as a sole trader, and this is because a company can earn dividends from its investments without being charged any tax. So when combined with other profit generating activities, investing through a limited company can lead to a significant reduction in your overall tax obligations.
- Diverse Investment Options: The way a limited company functions makes it ideal for investment diversification. This means you can invest in different assets such as stocks, investment funds, shares, real estate or bonds; to name a few. The logic behind this (in theory) is that a diversified portfolio can reduce risk and increase the chance of potential returns.
- Pension Contributions: Another benefit of investing through a limited company is that you can use contributions made to pensions more tax efficiently, and you can even be exempt from National Insurance. This is quite useful for retirement planning.
- Asset Protection: For those who are risk averse, and who like to plan in case of emergencies, then operating through a limited company provides protection for personal assets against business liabilities. This is a legal separation and ensures that personal finances are protected in the event of financial downturns within your investments.
- Strategic Growth: Last but not least, companies who have sufficient capital reserves can have more lucrative capital growth by investing through a limited company, and this is due to lower corporation tax rates compared to those found with income tax.
While the examples above have been commonly reported, be sure to conduct thorough research into the benefits above, and, ideally with help from financial and tax
Potential Risks and Disadvantages With Corporate Investment
While there are numerous benefits to investing through a business, there are also risks and challenges to consider. These must be weighed up carefully in order to avoid negative impacts on your business's financial health.
Below are some of the risks and disadvantages that could potentially arise.
1) Market Volatility
Arguably the biggest risk of investing through a business is the unpredictable nature of investing. Fluctuations in industry specific industries, economic downturns and political instability are just a few examples of volatility that can bring about losses in your investments. It is therefore fundamental to build/adopt a strategic approach for investing, and this includes having a long-term perspective and having contingencies in place.
2) Resource Diversion
Because running a business is a full-time job in and of itself, it can be argued that there's a risk of diverting important resources away from your core business. This is because investing requires significant time, resources and attention, so allocating substantial resources here could potentially hinder your main revenue operations. So planning meticulously and knowing how to find a good balance for resource allocation is a must, as failure to do so could result in you losing money, rather than making extra income.
3) Liquidity Issues
Another risk that could arise from investing is having much-needed liquidity tied up for extended periods. So if your core business is struggling and needs a cash injection, then having investments elsewhere will prevent you from supporting your main revenue operations. In addition to this, having capital locked up in certain investments may also limit you from investing in more opportune investments elsewhere. So the lesson to be learned here is that you should only invest what you can afford to do without, and each investment you make should be made off the back of extensive research and due diligence. What's more, you should adopt a long-term mindset to avoid any potential frustration.
4) Complex Tax Considerations
Although investing through a limited company can bring about an array of different tax benefits, it can also bring about potential issues if you aren't on top of things. Misunderstanding/mismanaging your tax obligations can lead to inconvenient tax liabilities, and this can potentially erode the benefits of your investment activities.
This highlights the importance of thorough tax planning, and if you want to ensure you are making no basic errors, then consulting with a tax professional may be worthwhile.
5) Need for Expertise
Successfully investing capital requires a certain level of expertise and knowledge, and quite often relating to industries and niches that have nothing to do with your core business. So without a thorough understanding of what you are investing in, then you will be rolling the dice on whether you make good returns or not.
It is why you have three choices to mitigate this risk. You either engage with an accredited investment professional, you put aside a substantial amount of time to gain a strong level of understanding, or you find investment vehicles which are data-driven, and transparently show the historical performance of an investment.
Types of Investments Businesses Could Consider
In the event that you think that the benefits outweigh the potential risks and challenges, then the following investment avenues may be of interest to you. But whatever you do, it's essential to consider a diversified approach to minimise risks and maximise potential returns.
1) Stocks and Shares
Investing in the stock market has been a popular investment avenue for both businesses and individuals alike over the past few decades. Through buying shares of publicly traded companies, businesses have the chance to benefit through capital appreciation and dividends. However, as mentioned earlier, you will need to have a thorough understanding of the industries you are investing in and have contingencies in place in the event of any volatility.
2) Bonds and Fixed-Income Securities
Bonds and fixed-income securities are ideal for those who have a low-risk appetite because they offer investors stable and predictable returns. Although these returns may not be as lucrative compared with other investment vehicles, investing in bonds usually brings in interest payments on a continuous basis, making it less risky than other more speculative investments.
3) Real Estate
Investing in commercial or residential real estate offers the potential for rental income and property value appreciation. Real estate investments can be a tangible asset for a business's portfolio, offering diversification and a hedge against inflation.
However, real estate requires significant capital and management of property-related tasks, so not only will your business have to put up a sizable amount of cash, but you will also have to sacrifice a portion of your time to manage things. But if you have the capital to spare, then management can easily be outsourced to third-party real estate agents, saving you time in the process.
4) Mutual Funds and ETFs
For businesses looking to diversify without the need to manage individual investments, mutual funds and exchange-traded funds (ETFs) provide a way to invest in a basket of assets. These funds can include a mix of stocks, bonds, and other securities, managed by professional fund managers. There are now even Bitcoin ETFs.But it's important to be aware that not all ETFs and fund managers are equal in terms of quality and returns, so comparing and contrasting based on reviews and performance is recommended.
5) Crypto Strategies
As blockchain technology continues to revolutionise the financial sector, businesses are increasingly exploring cryptocurrency as an investment avenue. Platforms like ICONOMI offer an innovative approach to crypto investment through crypto strategies. These strategies allow businesses to invest in diversified portfolios of cryptocurrencies, managed by experienced strategy managers. What's more, the platform offers crypto business accounts, making it easy for companies to diversify into the exciting asset class.It is important to note that although this approach has the potential to offer high returns, it still comes with higher volatility and risk, making it essential for businesses to conduct thorough research and consider their risk tolerance.
6) Private Equity and Venture Capital
It is becoming more and more common to see businesses investing in startup companies, either through private equity, or venture capital. This investment avenue can bring about big returns if a business gets in early on a startup that ends up making lots of revenue, or that gets acquired by another company for a large sum. But it's important to be aware that investing in startups often requires more than just capital investment, and requires the investor to offer up other contributions like industry expertise, high-level connections, or hands-on business contributions. What's more, the investment outlook for this avenue is long-term, so requires investors to be patient.
7) Commodities
Last but not least, and perhaps the oldest investment avenue is investing in physical commodities like gold and silver. The underlying logic here is that valuable commodities like these provide a hedge against inflation, as they consistently maintain a steady value. However, even commodities like gold and silver can be influenced by global economic and political factors, so investors should still stay informed about market conditions.
Conclusion
To sum up, it's clear that investing as a business has many opportunities, as well as risks and challenges. Whether it's physical commodities or digital innovations within the crypto market, each investment avenue holds the potential to bring about additional revenue for a business.
However, one should be aware that successful investing doesn't solely rest on choosing the right assets but also hinges on a deep understanding of one's business goals, a thorough assessment of risk tolerance, and an unwavering commitment to strategic diversification. So by adopting a meticulous approach that is backed by solid research, it is possible for businesses to navigate the complexities of the investment world in a way that can bring about returns.
That being said, regardless if you tick all the boxes of being a good investor, investing will always be a risky affair due to its speculative nature. So to reiterate, it is strongly advisable to only invest what you can afford to lose, as no investment is worth risking the financial health of your business.
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