Make the Most of Your Cash in the Current Rate Environment

BY: Sam Huntington


Depositors know that the short-term rate environment continues to offer very few opportunities to earn interest on cash holdings. Even though yields on longer-term treasury issues have gone up since year-end 2020, rates for terms under one year on the yield curve have seen a decline this year.  

When Treasury investors are receiving less than 0.07% for Treasuries under one year, one can be sure that banks are in the same situation. Ever since last March, when the Federal Reserve took the unprecedented step of dropping interest rates a full 1.00% on a Sunday, businesses have had to reset their expectations for generating revenue on excess funds. The Fed’s target rate zone has remained between 0.00% and 0.25% since then, and bank deposit rates have followed suit.  

Although a bank money market account offers a safe place to keep funds with immediate availability, there are other alternatives a business might want to consider before parking excess capital in a money market account for the long term:

  • Paying down debt with excess cash. This is a great opportunity to speak to your banker about using excess funds to pay down revolving or term loans. There are advantages and disadvantages to prepaying credit obligations, but your banker can help you better understand your balance sheet and identify situations where you can save on interest costs while maintaining adequate cash on hand.
  • Taking advantage of trade discounts. If you make purchases from a supplier that offers trade terms such as a 2% discount for payments made within 10 days or the full amount due in 30 days (2/10, net 30), you’re paying annualized interest of over 36% if you’re not taking advantage of the discount. While remaining mindful of monthly cash needs, taking advantage of trade discounts is a much better way to use your cash effectively.
  • Consider capital expenditures. Making capital purchases with excess cash could save money by allowing your business to lower taxable income through increased deductions. The decision to purchase land, physical space (e.g., a building), or equipment should be made with an eye to the business plan and after consultation with your banker and accountant.
  • Review other investment alternatives. The Wealth Management team at State Bank of Cross Plains speaks to businesses every day about the best use of business capital. Options for businesses to best employ excess funds include establishing/funding a retirement plan, higher yielding accounts, and tax-advantaged investments.
  • Certificates of deposit. If you believe rates will remain low for the next year or two, putting funds in CDs enables you to lock a higher rate in a safe investment. Many depositors use a “laddering” strategy of investing funds in CDs of different maturities, so a portion of the funds becomes available more frequently while still benefiting from the higher rates of a term investment. Most CD rates have fallen since the end of 2020, so this would have been an especially good strategy a year ago, and it remains a viable option for some investors.   

Any business that has been around through the pandemic already knows that even the best revenue projections often require mid-cycle adjustment. Anticipating further disruption to normal commerce is a pragmatic way to plan for cash needs in the near future and beyond. Please contact me at (608) 826-3516 if you would like to discuss your cash management options. 

Author:

Sam Huntington

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