Cash on Deposit or Corporate Investment Bond?
Company Surplus: An Alternative to Cash on Deposit
When it comes to surplus cash on your company’s balance sheet, it makes perfect sense to keep that money at arm’s length in a deposit account. That way, you’re able to meet short-term cash requirements, right? While that may technically be true, it doesn’t mean that it’s the wisest way to manage company money. In fact, over time, holding cash on deposit could actually have a negative impact on your business balance sheet.
Deposit Interest Rates and Inflation
The highest interest rate on a fixed five-year deposit is currently 0.1% AER. Deposit interest rates are at an all-time low, with many banks offering negative interest rates. Taking inflation into account, keeping your money in an account where it’s not growing means that spending power will be impacted in years to come.
For example — let’s look at the value of €50,000. Taking inflation at 2% (keeping in mind that Ireland’s annual inflation rate was 3.75% in September 2021), in ten years, that €50,000 will be worth €41,071 in today’s terms.
Simply put, if there’s a way to make your money work harder and gain some momentum along the way, you should be seriously considering it — and soon.
Corporate Investment Bonds
We’ve established that deposit interest rates do very little in terms of helping surplus cash grow, so why do companies use them? Beyond having money that’s easily accessible in case the business needs it, cash on deposit is often chosen as a savings option by default. Many companies simply aren’t aware of the benefits of alternatives, such as corporate investment bonds.
With a corporate investment bond, your cash is invested in a fund that matches the risk profile that you’re willing to take. That way, the fund can be diversified but still remains accessible. To set up a bond, a full plan is built with a financial advisor to decide where and how you would like to invest a lump sum of money, taking your company goals into consideration. There are multiple funds to choose from, as well as asset classes to consider (e.g. stocks, cash and cash equivalents, gold, real estate).
Taxes also come into play when looking at the advantages of choosing a longer-term corporate investment bond over leaving cash on deposit. Any income that arises from a deposit account is subject to an annual corporation tax rate of 25%, and for close companies (Irish resident companies that are controlled by five or fewer participators), a further 20% surcharge can apply if this additional income isn’t distributed within 18 months. If you’ve invested in a bond or savings plan, on the other hand, tax can be deferred up to the 8th policy anniversary. This means that businesses have the opportunity to compound investment earnings, something that isn’t possible with cash on deposit. An exit tax of 25% does apply to corporate investment bonds, but there is no such ‘close company’ surcharge because it’s not viewed as income, unlike deposit interest.
So what kind of return can companies expect from a corporate investment bond? This depends on many factors, such as the type of fund, risk rating, and duration. Let’s look at some performance examples in average level 3/4/5 funds.
This example is based on an investment of €100,000 over a 5 year period. The potential returns depend on the risk rating of the investment fund (i.e. higher risk = higher potential return) and is inclusive of a standard 1% annual management fee. These are gross figures based on compound interest and don’t take tax liabilities into account.
As is the case with any investment, a level of risk is involved and the value of your investment may go up as well as down. That’s why it’s absolutely essential to choose an investment fund that’s the right fit for your business and to work with experts in the area to ensure that you are getting impartial advice.
While there is a level of assurance in leaving your company’s surplus money in cash on deposit, the certainty is this — those savings aren’t going to grow. Talk to us about building a plan for your surplus cash by booking a free 1:1 consultation with a member of the Elevate team today.