As an entrepreneur, you already understand you need to invest in your business if you would like it to be successful.
Many business owners are also looking for an additional business income, whether that’s by giving themselves a raise, increasing their staff or simply investing in their businesses.
While you can invest as an individual, there are always some investment options you can do through your business so your business becomes the investor and takes on everything that that entails.
To maximise your return on investments and avail additional funds to your small business, we are going to look at some of the best investments small businesses and their owners can make.
Investing in Other Businesses
While there are various ways to invest in other businesses, direct investments are becoming very popular.
There are two main ways of investing in a business directly.
The first one is where a business makes an equity investment into another business. In this type of investing, the secondary business gets a percentage of the primary company.
The primary company then gets the funds it needs for its own investments or for whatever else it needs the money for.
When businesses buy an ownership stake in another business, they take a share of the profit made by the second company.
One important thing to note is that the secondary business also takes on the losses and the liabilities of the second company at the same percentage as their ownership stake.
This means business owners who are looking to invest in other businesses have to do thorough research and be careful to ensure they are investing in profitable and reputable companies.
The second way a small business can invest in another business is through what is known as a debt investment.
Here, the secondary business loans the primary business cash which is to be paid back at an agreed interest rate or the prevailing market interest rate.
Businesses can invest through regular amortisation, where the interest is paid off first and the rest of the loan is paid later, or through the purchase of a bond, which we will explore further below.
The main advantage of debt investment is that the lender always gets the priority should the business they have invested in go under.
This means the risk is lowered for the business making the investment as there is a high chance to get its money back no matter what happens.
Stocks have been a favourable investment option for a very long time.
Investing in stocks means buying shares (equities) of other businesses so you own a part of those businesses.
When you do this, you make a profit when the price of the shares rises and you have to take on the risk that the share price can fall.
For businesses that are looking to invest in stocks, the best option is investing in dividend stocks.
Dividend stocks are stocks that pay a certain amount depending on the terms of the contract entered into when investing.
Many companies pay a dividend annually, but it is possible to find companies that pay a dividend every three or six months.
When a business invests in dividend stocks, it means they earn money from the profits made by other companies, which is a great option to have.
The other option is to invest in growth stocks. These are stocks of companies that are growing very fast.
Although these types of stocks are riskier than other types of stocks, you will see faster growth of your investments when you invest in them.
Do note that growth stocks do not often pay a dividend because the companies behind them opt to invest money back into the company instead of paying their investors a dividend.
No matter the types of stocks you decide to buy, things have become easier for new and experienced investors.
Platforms like WealthSimple make it easy to invest in or trade stocks, and they have an in-depth guide for those who want to know how to buy stocks in Canada.
WealthSimple creates powerful financial tools to help you invest and grow your money whether you are looking to invest in stocks, funds or crypto.
They also have real humans standing by to help you create a personalised investment portfolio and to answer any questions you have.
New investors also get one highly-valued free stock to get started.
Bonds are fixed-income investment vehicles that pay interest to the person or business providing the money in regular payments.
Bonds are often structured as loans to the government or businesses as discussed above.
The main advantage of investing in bonds is that they pay a regular income at fixed intervals.
This means businesses that want an injection of cash annually or semi-annually can invest in bonds knowing they will have the injection of cash when they need it.
The main reason why many businesses choose bonds over other types of business is that they are generally safer than stocks.
With stocks, there is no reprieve should the share price fall and wipe out your investment.
However, bonds issued by the government are paid to investors, although the interest rate might fluctuate depending on market conditions.
For bonds offered by businesses and other entities, the investors holding the bonds are either paid according to the agreed-upon schedule or first if the business goes under.
Funds are money reserves that are often managed by investment professionals.
Funds pool money from investors to make various investments that the investors do not have to know about.
In many cases, these bonds are used to invest in specific industries, businesses or investment sectors.
Businesses can invest in managed funds to get a high return on their investment.
The main advantage of investing in funds is that it gives businesses access to large investment pools.
For example, if you invest in indexed (mutual) funds, the money is used to invest in a larger portfolio of stocks from various companies or industries.
When the shares in the funds make money, the profits are distributed to everyone who has invested in the fund.
Some investors also buy mutual funds, wait for their price to increase as the price of the individual shares in them increases, and then sell them to new investors.
Exchange-traded funds (ETFs) are very similar to mutual funds with one key difference; you can sell ETFs throughout the trading day as if they were shares, but you cannot do the same with a mutual fund.
The value of an ETF will go up and down during the day as people buy and exit their positions while the price of a mutual fund is calculated at the end of the trading day.
Certificate of Deposit
In Canada, certificates of deposit are also known as guaranteed investment certificates.
These certificates are sold by financial institutions and are often insured by the government.
The money invested or deposited in a guaranteed investment certificate account earns a fixed interest but has to be held in the account for a fixed period.
Certificates of deposit are usually very safe because you are essentially lending a reputable financial institution your money so you can earn interest on the money.
Businesses that want to make large investments into themselves, such as buying office space or equipment, can use certificates of deposits to hold the money to do the investment and earn interest on it while making plans on how to invest the money.
Although there are a lot of traditional and online banks that offer certificates of deposit at different rates, it is important to remember there are penalties for withdrawing the money before the agreed date.
It is therefore important that businesses only invest the money they wish to not use for the duration of the contract.
High-performance Saving Accounts
These have elements of normal savings accounts and certificates of deposits embedded into them.
The main difference is that many of them are not offered by traditional businesses which means they often come with higher expenses.
These saving accounts often offer great interest rates but very strict terms.
It is therefore important that all investors read the fine print before depositing money into these accounts.
Cryptocurrency is becoming a popular investment for a lot of businesses, so it deserves a mention.
Cryptocurrency is digital currency that can be exchanged online for goods and services or other cryptocurrencies.
The main draw is that cryptocurrencies often have a very high return on investment. However, they are very risky for several reasons, one of them being speculation.
While the value of a cryptocurrency can rise greatly for a few months, it can also fall fast within hours or days so it is always best to do proper research before investing in any cryptocurrencies.
Although business owners can invest in their personal capacities, small businesses can also invest.
Fortunately, there are lots of investment options available for small businesses, and it is up to business owners to choose those they think would work well for the business, their goals, as well as their risk appetite and tolerance.