What’s the best way to grow cash for your business? Like expanding your personal savings, the answer can be found among a mix of well-tuned strategies, products, and considerations – including GICs.
With no shortage of options, it’s important to understand the pros and cons of business guaranteed investment certificates (GICs). Sean Clark, Manager, Cash Management in CWB’s Markham Banking Centre, is here to help entrepreneurs do just that.
First off, let’s do a quick run-down of the advantages of business GICs. We’ll then work backward with Clark to determine how a business GIC might have a place in your cash management strategy.
Advantages of business GICs
- Interest income is taxed at a lower rate for businesses than individuals.
- A straightforward investment product.
- Guarantees on principal and interest mean little-to-no need for market monitoring (unlike stocks).
- Fixed rates allow you to calculate at the get-go what you’ll receive when the GIC matures, making budget planning easier.
- Short-term options can help pay off debts or save for large or urgent purchases.
- Longer-term options can help increase cash flow or save for goals that are further off.
Personal GICs vs business GICs
Like personal GICs, the money you invest in business GICs is protected. When the GIC comes to term, you get back every dollar you put in, plus what you earned in interest. How long you invest is up to you. You can also hold multiple GICs at once with different term lengths, rates, and liquidity – such as fixed, long term, short term, redeemable, and floating rate.
That said, unlike personal GICs, entrepreneurs typically don’t park their money in business GICs for any great length of time, says Clark.
“Business owners usually purchase business GICs when they have an influx of cash,” he says, noting that most owners already have a good idea of how they’ll use that cash. “Purchasing more machinery, a new building, or a big upcoming order are examples of what they may be gearing that money up for.”
In contrast, personal GICs are often invested for longer – the cash is intended to sit and grow as part of a rainy day or retirement fund. Consequently, Clark says you may notice a tendency for personal GIC interest rates to be more attractive than business GIC rates. “A bank can provide higher rates when they know the money isn’t likely to move anytime soon,” he explains.
Personal GIC rates may be higher, but think twice about using them for your business funds
If the interest-earning potential for a personal GIC appears more attractive than a similarly-termed business GIC, could you use it to grow your business funds faster?
Short answer: not a great idea. As Clark clarifies, there’s a reason why business-specific GIC products exist. First of all, there are tax implications that favour business GICs.
“With personal income, you’re taxed on anything over $1,000 worth of interest. So if you’re pulling a large sum from your business into a personal GIC, you could stand to lose a significant amount of interest earnings to taxes. In contrast, interest earned on business funds is taxed at a lower rate,” says Clark.
A second consideration is having quicker access to your money if you suddenly need it.
“Let's say I'm a business owner and I pull $200,000 from my business for a fixed short-term personal GIC with a great rate,” says Clark. “What happens if the business then faces unforeseen headwinds and I wind up needing the cash? It's now more difficult to get that money back into the business than if the money had simply been in a fixed short-term business GIC.”
Is a business GIC right for your business – right now? What to consider.
For many business owners, the goal is to maximize business growth. When you put funds into a business GIC, those funds are then considered inactive because the business isn’t using them.
“You’ll want to assess whether putting that money to work might get you a better return than a GIC,” says Clark. “Maybe the GIC rate is 4 per cent. Could you exceed that return by investing the money in your business? For example, what if you put it towards something that could increase your sales capability? Could you use it to buy new software to help hire and train more salespeople? Maybe you have a 30 per cent profit margin. Increasing your sales by, say, $200,000 could be a much more effective way to grow your cash.”
Access to working capital
Clark adds that a GIC may also not be the best option for funds that are earmarked for working capital. That’s because you’ll want to keep the cash accessible if unexpected issues or opportunities arise.
“A fully liquid savings account is likely a better fit for working capital. Knowing your funds are available at all times and can help a business owner sleep better at night,” he says.
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Choosing the right business GIC
One of the great things about GICs is the amount of options. How’s a business owner to choose? By weighing factors similar to those that you would consider for a personal GIC, says Clark.
- GIC term length: Do you know what big expenses are coming up – and when? Clark says this is where solid forecasting is key. “Sometimes, to be on the safe side, a client will opt for just a one-year GIC. But if your forecasting is spot on, maybe you’d see that you can actually do a two-year GIC and benefit from the extra interest.”
- Market trends: Do you have a good handle on how your business is doing right now? What about over the next few years? “Again, this comes back to the quality of your forecasting,” says Clark.
- The rate environment: Are rate hikes coming? Is a dip anticipated? “Being in tune with Bank of Canada news and activity can help inform where to invest, when, how much, and for how long,” says Clark.
Bringing it all together
Business GICs can be an effective part of your company’s cash management strategy and they’re designed specifically to benefit businesses like yours. Like all investment options, it’s important to understand and consider the features, terms, and scenarios that might make them a good fit. Reach out to CWB Cash Managers like Markham’s Sean Clark for guidance on the best strategies to support your financial success.