Well-run companies regularly generate profits that they would like to invest profitably. In the current low-interest phase with a negative Euribor interest rate and the monetary policy of the European Central Bank (ECB), it is difficult to find an attractive investment. At the same time, some banks are openly talking about negative interest rates or penalty interest rates for company accounts with high balances. As a result, more and more companies are looking for an alternative to redirect the credit balance or invest in other forms of investment. This development alienates companies and traditional credit institutions and forces companies to take on significantly greater risks when investing money. However, thanks to detailed information, the risks can be limited and companies can invest money profitably despite low interest rates.
How do companies behave in low interest rate phases?
A company should pay attention to a balanced liquidity and immediately balance accounts with a debit balance. If the bank threatens negative interest rates for a business account with a high balance, it is worth transferring the funds to an account held with another credit institution. Foreign banks and online providers, some of which offer higher interest rates, can also be considered. At the same time, the Chief Financial Officer (CFO) can inquire about alternative investment opportunities in the short to medium term. However, companies must adapt and expand their risk profile and investment guidelines.
Which investment ideas make sense?
In times of low or negative interest rates, companies should not maintain a high balance on the current account, a call money account or as short-term bank deposits for up to six months. Instead, it is recommended to invest money as fixed-term deposits with a longer term, for which banks pay higher or positive interest rates. Another recommendation is money market funds, which generate positive returns after deducting costs. Commercial papers and short-dated bonds are also an alternative to invest the company’s credit balance profitably. Company participations or the acquisition of a competitor represent further alternatives that can generate a good return. Some companies, such as Airbus or the machine manufacturer Trumpf, have even founded their own bank in order to become independent of traditional credit institutions and investment forms.
What risk do companies take when investing money?
In the financial market, the rule applies that with increasing returns, the risk of suffering a financial loss also increases. Entrepreneurs must take this into account when they are looking for a high-yield investment. Bank deposits in a call money account or a fixed-term deposit account are subject to deposit insurance and are a very safe investment. When investing in a money market fund, the return usually increases, but the deposit insurance is no longer applicable and the fund is subject to price fluctuations. Commercial papers leave the investment grade area, as the issuers are companies whose rating is below BBB at the rating agency Standard & Poor’s or Baa at Moody’s. However, financial experts consider the risk of default to be low, as the bonds are securities with a term of less than one year. If companies are willing to bear the greater risk, they can also achieve a double-digit return in a low-interest phase.
Recommendation for companies
The most important tips for companies in times of low interest rates are:
- pay attention to a balanced liquidity
- revise the in-house risk management
- look for alternative investment forms
If the CFO of a company has previously invested the company’s credit balance exclusively in bank deposits, the risk management must be restructured. Money market-related papers are observed and evaluated differently than traditional investments in the form of call money, fixed deposits or fixed-term deposits. The valuation of a money market fund does not take place on the same day, so that the company’s payment transactions must be coordinated with the changed valuation. In addition, companies must find a balanced balance between risk and return in order not to endanger the liquidity and the continued existence of the company.
Do you have experience with alternative investment opportunities? We look forward to your comment.
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