If you’re like most business owners you may be reluctant to tie up your cash in case you need it unexpectedly. You may be unwilling to put business capital into risky investments. You may be playing it safe by leaving it in a chequing or savings account that’s earning little to no interest because you want it secure, and right at your fingertips.
But if you’re leaving cash untouched in this type of account for longer than a few months, you’re leaving money on the table. Not only is your business losing out on a higher yield from better investment opportunities, but Canadian inflation alone is eating up 2% a year.
For a decade, Canada has experienced a low interest rate environment. But now that rates are rising, it may be time to consider investing your company’s money in something with a little more upside – but still secure – such as a GIC or term deposit.
And what if you need the money unexpectedly? There are financial solutions available that will ensure you’ll have access to funds if and when you need them. In this article we’ll discuss what you need to know about term deposits in order to advance your business’ financial position in a rising rate environment without risk.
A quick introduction to GICs and term deposits
GICs (guaranteed investment certificates) and term deposits are the same name for an investment that is deposited for a fixed period of time at a defined rate of return. The initial amount, or principal, is never at risk. Term deposits are available for a range of periods, from days to years, are redeemable or non-redeemable, and may have a simple interest rate or one that escalates over time. Typically, the longer the term, the higher the interest rate; and non-redeemable ones enjoy a higher rate than redeemable ones.
Why now? Leveraging Canada’s rising rate environment
The Bank of Canada’s recent benchmark rate increases are a positive for cash and cash equivalents like term deposits. If you’re concerned that rates might go up again, consider a term deposit that allows you to jump into a different one. That way you’re locked into a good rate, but not locked out if rates rise.
Another strategy to take advantage of rising rates is to construct a term deposit “ladder” over a period of, say, three to five years. By staggering the maturity dates at one-year intervals, you’ll be able to reinvest the maturing funds for better returns as rates go up. But if they do the opposite, you have the security that the bulk of your money remains invested at higher yields.
Options for accessing cash
So what happens if you’ve purchased a term deposit and then need the money before the maturity date? If you think there is a real chance you will need the cash before the term deposit matures, you should likely choose a redeemable term deposit. You could also purchase multiple term deposits so you don’t have all your eggs in one basket and can cash out one if necessary and take a smaller penalty than if you cashed in the whole amount. Your financial advisor will be able to help you create the best strategy to meet your needs.
Features to consider
Here are a few considerations when choosing a term deposit for your business:
· the length of the term, which can range from days to years;
· whether your money can be withdrawn or “redeemed” before the maturity date (with or without a penalty);
· whether the term deposit is available as a tax-saving registered product;
· the minimum amount required, which may be as low as $500;
· how much higher the interest rate is than what you would gain from your current account; and
· the flexibility of the product – you may have the option to convert to a different term deposit with conditions.
Finding a strong, stable, yet flexible way to grow your business’ financial investments may seem challenging, given the changing interest rate landscape. If you’re seeking guaranteed growth and security and have underutilized cash reserves sitting in a simple chequing or savings account, you may want to take advantage of a term deposit. Talk to your financial or business advisor for advice tailored to your unique circumstances.
To read the original article, please visit blueshorefinanical.com.
