Key investments every small business owner should consider making

Having multiple sources of income from different investments or assets will support the growth of your business as well as your own long-term goals. Here we outline some of the most promising investment options to get your money growing with an eye to what is good for you and the business.

What to consider before investing

Your business is not your end game, so your investments should support not only your company but also personal goals. Take the time to look beyond daily operations and consider investment options that you should make for the good of both. 

To choose the best investment, start by conducting research on the opportunity, calculate how much capital you need, assess your risk tolerance and evaluate the investment’s duration. 

Here we take a broad view of the types of investments that self-employed people can benefit from, ranging from traditional to some you may not ever have considered “investments.”

Stocks 

According to Dana Investment Advisors CEO Mark Mirsberger, who ranks first on the CNBC list of 100 financial advisors, “FAANG [Facebook, Amazon, Apple, Netflix, Alphabet] and other high-flying tech stocks have driven the major indices the past few years and benefited from the pandemic.” 

For small-cap stocks, which refers to companies with a market capitalization of less than $2 billion, public companies represented by the Russell 2000 index may offer better investment returns. At the time of publication, California Resources Corp., Home Point Capital and Genworth Financial are the three small-cap stocks with the best value and fastest growth on the list.

That said, most financial advisers recommend investing equally in three to four broad market index exchange-traded funds, such as the Dow, NASDAQ, S&P 500 and the Russell 2000 and then letting time run its course. 

Real estate

Investing in commercial real estate, such as office complexes, apartments and warehouses, can generate income and provide tax benefits to the owner.  Another advantage is you can borrow most of the investment amount from the bank and pay it back over time. As the property continues to appreciate and net cash flow grows, it could generate an income for life.

IRAs

An IRA lets you save for retirement with tax-free growth or on a tax deferred basis. Small business owners and the self-employed can only set up SEP and SIMPLE IRAs. 

With the SEP, only the employer contributes to the account, up to 25% of their annual salary or a max of $57,000 for 2020. They must contribute an equal percentage for all employees. With the simple IRA, available for employers with no more than 100 employees earning more than $5,000 in the preceding year, employers must contribute either 2% of employees’ wages up to $285,000 for 2020 or match employees’ contributions up to 3% of individual earnings. 

Index funds 

As noted previously, advisers recommend diversified index funds since they offer low expense ratios or fees. They are passively managed and comprise stocks that mirror the companies and performance of a market index.  By investing in an index fund, you get the weighted average return of all the companies in that fund. Index funds also historically tend to perform better than actively managed funds. 

Investing back into the business

Focusing too much on maximizing profits may actually be costing you. Is it possible your business is too lean? Investing in technology could yield more transactions and speed up certain tasks, in turn increasing your business’s cash flow. As your company grows, you may want to invest in tools like Salesforce and Tableau to help employees meet increasing demands.

Investing in yourself

It’s easy to overlook the most important investment you should make, which is in yourself. Your physical and mental health are important for the future of your business and your quality of life. What would investing in the business of you look like? Anything that improves your well-being. It could mean getting a long-overdue physical exam or taking time to exercise. Maybe you take up running or meet up with old friends. You might also consider outsourcing your business’ repetitive tasks to conserve your time and energy.