The primary objective of every small business owner is to generate a profit. Once an established business has a consistent revenue flow, savvy business owners may take some of that revenue and open up a business investment account.
In this article, we’ll explore why business investment accounts are one of the best ways to make your money work harder for you so your business can generate passive income.
What is a business investment account and how does it work?
A business investment account is a set-aside fund that can be used to open a brokerage account, fund a retirement savings plan, or purchase hard assets or real estate. Each of these can generate a financial return for your business. Brokerage accounts give you the ability to buy stocks, bonds, ETFs, and mutual funds.
Setting the money aside is the first step in establishing a brokerage account for your business. That can be done by creating a sub-account with your business checking account. Money earmarked for investing can be easily transferred into a sub-account. Withdrawing is also simple if you find you need those funds later to use for operational expenses.
Are investment accounts FDIC-insured?
Leaving the money in your business checking account makes it eligible for FDIC insurance, which covers up to $250,000 per depositor. But that coverage can be increased by banks that use sweep networks to spread your money around more effectively. The importance of sweep networks was highlighted last year when several bank failures had businesses seeking expanded FDIC coverage.
Moving your money into a brokerage account means it won’t be covered by FDIC insurance, but that doesn’t mean it won’t be protected. In fact, SIPC insurance covers up to $500,000 in brokerage account assets, and $250,000 of that limit can be cash. Other SIPC-protected assets include stocks, bonds, Treasury securities, CDs, and mutual funds. This coverage does not cover commodity futures or cryptocurrency.
Benefits of business investment accounts
Investing typically comes with risk, so don’t use funds that you’ll need to cover operational expenses or overhead. Despite that, creating a business investment account can benefit your small business in several ways:
- A small business brokerage account can give you the ability to invest in stocks, bonds, ETFs, CDs, and mutual funds. Returns from those investments compound over time.
- Selecting the right investments or allowing a financial advisor to do that for you could generate high returns. The S&P 500 is up over 17% in 2023.
- There are potential tax benefits to having a business brokerage account, like writing off losses at the end of the year.
- Using excess cash to invest will normally generate a higher return than simply leaving it in your business bank account. It’s also harder to spend if it’s not there.
Types of business investment accounts to consider
Depending on your risk tolerance and need for liquidity, you can figure out how much of your idle cash you’re willing to invest. This amount can help you determine which type of investment account is right for your business.
Business money market account
Risk-averse business investors should consider opening a business money market account. Think of it as a checking account that works like a savings account because it pays a higher rate of interest. Money market accounts usually come with a minimum balance requirement. Everything over that minimum is liquid, giving you access to at least some of your cash when you need it.
Business treasury account
A business treasury account is used exclusively to buy U.S. treasuries, which can be purchased in increments of $100 and are exempt from state and local taxes. Treasury returns are usually higher than savings account interest rates and, depending on your account, your funds could be easily accessible should you ever need them.
Business brokerage account
The business investment accounts with the highest risk factor are business brokerage accounts, but they also can offer the biggest upside. Brokerage accounts give you access to stocks, municipal and corporate bonds, certificates of deposit (CDs), mutual funds, and ETFs that track specific market sectors.
Is a business investment account right for me?
There are several questions you need to ask yourself before opening a business investment account. Use the list below to see if investing is the right path for your business.
- How much excess cash do you have to invest?
- Do you need easy access to your funds?
- What types of returns are you looking for?
- Do you want to make short- or long-term investments?
- What is your appetite for financial risk?
How to open a business investment account
You can use your business checking account to set aside funds to invest, but you might need to go to an actual broker to open your brokerage account. When using business funds, it’s recommended that you hire a financial advisor or registered rep at a broker dealer to handle your investments. They will most likely ask you to provide the following information:
- Legal business name
- Business address, email, phone number
- Business formation documentation
- Business checking account information
Some brokers require a minimum initial investment, while others do not. Be sure to ask about fees and commissions—independent advisors (RIAs) tend to be more reasonable with fees. RIAs are fiduciaries, meaning they work for you, not the company.
You can also look into investment accounts that are fully integrated with your business checking account. This makes it easier to move funds around when you need to, while giving you the opportunity to earn higher returns on excess cash.
Earn even higher interest on your business checking account balances.