When businesses record a higher than projected income at the end of a financial year, it can often be difficult to assess where to inject this surplus. For those seeking alternatives to traditional savings, there is the option of investment bonds. Richard Taylor and Rupert Connor, Chartered Financial Advisors, Acuma Wealth Management, take us through the steps.
Some businesses in the UAE hold a significant amount in cash. This can be for good reason; it allows management to react quickly to take advantage of opportunities as they arise and it can provide a buffer in the event of a downturn which, in a still developing economy such as the UAE, can be invaluable. After all, it is a well known fact that many businesses fail, not due to unprofitability, but due to having insufficient free cash with which to pay their immediate creditors.
Another factor with companies in the UAE holding cash is the unknown expense of gratuity payments. Depending on the size of the workforce and their average length of service, a business’ potential liability can be significant. There are companies that make absolutely no provision for their gratuity liability, which really is a huge risk, while others hoard cash, which carries a massive opportunity cost and leaves the business, open to other risks.
Sitting on cash can be an expensive luxury because it has an opportunity cost. Without going into too much detail, cash sat in a bank account earning interest, could, and maybe should, be being put to use elsewhere.
Even worse, a cash-rich company runs the risk of being careless. The company may fall prey to sloppy habits, including inadequate control of spending and an unwillingness to prune growing expenses.
But regardless of whether a business is holding the “right” amount of cash, which in itself is clearly a matter of opinion, they all have to hold some cash and this article concerns itself with what is an alternative for it.
Risks with holding cash
There is a risk associated with holding cash:
– The risk of not earning a much better rate of return by being put to a more productive use (the opportunity cost)
To combat the opportunity cost, if a business is going to hold cash, and not just for the short term (as a longer term hedge against unknown liabilities in the form of market downturns and gratuity payments) they need to be certain that they are getting the best rate of return on it.
Offshore investment bonds
One answer to both of these concerns is to invest corporate cash in an insurance bond with a major offshore life company. You may already be familiar with these sorts of wrappers from a personal investment perspective (they are very popular with expats and for good reason) but very few people are aware that they can be used to house corporate cash at very low cost.
Here are a few of the advantages of using an offshore investment bond wrapper to hold your business’ excess cash (cash over and above what you need to keep liquid for day-to-day cash flow management):
1. You can access high rates of return on cash that you might not be able to get through other conventional channels.
Offshore investment bonds provide access to multiple bank accounts from many different banks internationally. They offer deposits on an instant access basis or term deposits with terms from three months up to five years, with competitive rates offered for those who are willing to tie their capital up for longer periods.
2. You can easily switch your company’s cash between banks to get the best rates available.
If you are with one particular bank and you see another offering a better rate for corporate cash do you transfer your cash from once bank to the other? Probably not! The paperwork and hassle involved with opening a new bank account is rarely justified.
By using an offshore investment bond to house your company cash, you can withdraw from one account with one bank and put it with another bank offering a better rate with minimum hassle; no money laundering checks, no forms and none of the usual procedures that make it so difficult.
3. You can ensure your surplus cash is invested with only the most secure institutions.
Not all banks are born equal and there are some that are much more deserving of our faith. Is your surplus cash held with your day-to-day bank? If you choose to stick your surplus in an offshore bond, firstly be aware that the majority of the banks available within the bonds scheme have had to go through a stringent due diligence process (although this is my no means infallible) and if you have any doubts, you can easily move from one bank to another.
4. You can invest your cash in assets other than bank accounts to access even higher returns.
And finally, you always have the option of investing in something other than cash to try and earn a better rate of return. You need to be careful with this as anything other than cash will fluctuate in value and can (and probably will) fall in value at times and in some cases the rules stating what your company can invest in may prohibit such investments. But by widening your horizons it may be possible to significantly reduce that opportunity cost by earning a better rate of return on relatively low risk investment such as fixed interest investments.
It is also possible to split your cash between what you really need to keep available at a moment’s notice and what you can afford to take a slightly longer term view. For example, companies holding a significant amount of cash as a precaution against unknown gratuity liabilities can afford to take such a view and may find that they can get their cash working a lot harder for them.
The bottom line
Regardless of how much surplus cash you may have at your disposal there are more options than just leaving it with the bank with whom you do your day-to-day banking – and there are some very good reasons as to why you should consider not leaving it there. An offshore investment bond can provide options and security as well as the opportunity to make your idle cash work a bit harder.
Rupert Connor and Richard Taylor are independent financial advisors with Acuma Wealth Management. As qualified advisors in the region they help expats to get their finances in order, and maximise the financial opportunities available offshore and plan for future events.
Acuma Wealth Management offers three core services; wealth creation, wealth management and wealth preservation, which include retirement planning, pension transfers (SIPPS & QROPS), death tax and inheritance planning, life assurance and critical illness cover, group pensions and corporate benefit solutions, key man insurance and shareholder protection, and medical insurance.