(This column originally appeared in the Philadelphia Inquirer)
Even as commercial lending rates have more than doubled in the last year, interest rates earned on checking, money market and savings accounts remain stubbornly low as banks seek to maintain their profitability.
That’s not helpful for business owners, who have the unique challenge of trying to earn money on their cash reserves while keeping enough liquidity to meet daily working capital needs. Options remain limited, but the environment is slowly changing, and a number of investment choices with minimal risks are emerging.
“We’re advising our clients to buy short-term U.S. Treasuries, which benefit from the Federal Reserve’s rising rates,” said Matthew D. Liebman, a founding partner of Amplius Wealth Advisors in Blue Bell. “It’s pretty vanilla, but it makes sense to buy even a three- or six-month Treasury Bill given the interest earned and depending on how much the cash is needed in the short term, rather than just let the cash sit in a bank account earning very little.”
Andrew Hipple, a partner at wealth advisory firm Lane Hipple in Moorestown, agrees. “We’ve been advising clients to focus on the Treasury markets, too,” he said. “Treasury Bills are essentially risk free and can provide solid yields.”
Treasury Bills are short-term loans that you’re essentially making to the federal government in return for guaranteed interest income. They can be purchased in multiple denominations by your investment or wealth manager or directly from investment firms and other financial institutions. Both Hipple and Liebman say that purchasing short- and long-term Treasury Bills can offer much higher interest income than leaving money in bank — as much as 4.5% for a three-month Treasury Bill.
A similar — and lesser known — vehicle is Series I Bonds, which are inflation-protected savings bonds sold by the U.S. government. Current interest rates paid on these bonds are close to 7%, which is much higher than what most banks and traditional Treasury Bills are paying. There are also inflation-protected Treasury Bills, or TIPS, that, if held to maturity, can protect your principal against inflation and return satisfactory income. However, TIPS can be more volatile.
“I know this sounds too good to be true, but these investments are legitimate and very safe,” said Andrew L. Cooper, a founder of wealth management firm Cooper Eagle in West Chester. “We have been recommending the Series I Bonds frequently, depending on the client’s financial circumstances, because of their low risk.”
According to Cooper, individual small business owners can purchase up to $10,000 annually of the Series I Bond directly from the government rather than through a broker, and “they can provide a great return, particularly if more than one family member invests.” The bonds must be held for a year, so it’s important to consider your liquidity needs before committing. And the earlier in the year you purchase the better.
Another interest-bearing investment that requires some planning is bank certificates of deposit or CDs. With CDs, you’re going to lock up your cash for a set period, but you can purchase multiple certificates at various maturities to make sure you meet your operational needs. Also, because Federal Deposit Insurance Corp. (FDIC) insurance covers only up to $250,000 of your deposits at an institution, it’s a good way to protect your money by spreading anything over that amount to different banks. The interest rates for certificates of deposits now range around 3.5% to 4.5% for a 12-month security.
“CDs are good, but they’re still our second choice behind Treasuries, particularly if you’re a business owner that needs cash more readily available,” Liebman said.
Hipple agreed there are downsides. “CDs offer a good guaranteed return, which gives people safety and security,” he said. “But in a rising rate environment, you can forego liquidity, which comes with opportunity costs, because as rates rise you’re locked in to that CD and can’t invest your money elsewhere.”
One other potential source of interest income is municipal bonds. These are a popular choice for business owners in higher tax brackets. Although the interest rates paid are usually lower than federal Treasury Bills, the income is tax-free. So when you take into consideration both the income earned and the taxes saved, your total return could be significant.
Investment decisions for small-business owners can be different from those for individuals. You should rely on a good financial adviser to help you make these decisions.
“The interest you get on that cash is probably less important to you than its availability,” he said. “But if you can lock it up a little longer, you can definitely earn a few extra dollars.”
Cooper also believes in business owners keeping their options open.
“There will continue to be significant market turmoil this year, and you don’t want to lock up your cash for too long,” he said. “Liquidity is key, so shopping for the best short-term rates so that you can get your money back quickly and easily if you need to is probably the best strategy right now.”