Why Should I Invest in a GIC for my Business?

Canadian business owners often face large costs to run their business for things like materials, labour, and equipment. Business owners looking to save and grow their money can benefit from GICs for the following reasons:

• Accessibility. GICs are a common investment product that can be purchased by most investors through the majority of financial institutions. This is perfect for business owners who want straight-forward investment options to fund their operations.

• Business owners are often not in a position to risk large amounts of cash. With a GIC, you are guaranteed to be given back your deposit, while earning additional funds through interest. If this sounds just like having a savings account, it’s worth noting that the interest rates for GICs are higher, and therefore more effective at growing your money.

• GICs with a fixed interest rate allow investors to calculate exactly how much they can get out of the investment long before it reaches maturity. This is beneficial when planning out the budget for a business.

• Convenience. Unlike investment tools like stocks, GICs do not need to be monitored or adjusted. This makes them a simple and straight forward option that isn’t demanding on your time.

The conditions of your investment depend on your financial institution, and the type of GIC you choose.

No matter your financial goals, comfort with risk, or need for cash, there is a GIC option for every business owner looking to invest.

Fixed rate GICs are common and simple, ideal for those who are comfortable with depositing money and leaving it for some time. They involve set terms that can be anywhere from a month to several years, depending on your institution. During this time, your money is inaccessible, and a fixed interest rate is earned on your investment.

Variable rate GICs are more risky and less popular. They are intended for those who are hoping for a higher return, and willing to risk potentially earning less. Instead of using a fixed rate, they are based on the prime rate, which varies over time.

Cashable GICs are a shorter-term, flexible option for those who want to access their funds if necessary. The downsides of being able to withdraw your funds without penalty is that interest rates will likely be lower, and cashing out too early may result in little-to-no returns. This means it is best to be strategic when purchasing this GIC option.

Market or equity-linked GICs are another option that is riskier and more unpredictable, offering a chance at higher returns. Interest is earned based on the performance of the stock market index. If the market does not perform well, you will receive no return. Your initial investment, however, is guaranteed.

Escalator GICs are a low-risk option similar to fixed rate GICs. However, the fixed interest rates of escalator GICs increases every year you own the investment. This incentivizes investors to not withdraw their money early, so that they do not lose out on the maximum interest rates achieved in the final years of the term.

Across each GIC option and financial institution, interest rates and term lengths will vary. Additionally, the intervals at which you are paid will differ, as some options allow for routine interest payments every month or so, while other options may make you wait until the investment reaches maturity.

If you are uncertain which investment option is right for you, first consider your financial goals for your business. Perhaps you are saving up funds for a new piece of equipment or adding a new employee to your team. Along with these goals, consider how quickly you would like to see the return, or access your investment. Answering these two questions will prompt you to decide if short or long term GIC options are best for your business.

Short-term GIC options usually range from 1-12 months, have higher liquidity, and are therefore more flexible. They are great for saving for large but somewhat urgent purchases such as equipment and inventory. Short-term options also help you pay off debts while still being able to invest your money.

Alternatively, long-term GIC options are between 1-5 years, and offer higher rates of return. This option is better for saving for longer term goals, such as buying a new building or property. However, the higher returns and stable, low maintenance characteristics of long-term GICs make them a great option for increasing cash flow in general, so long as you are comfortable with not having access to the investment funds in the immediate future.

The versatility and simplicity of GICs make them a great option for any portfolio, but especially for business owners. It is an effective and safe investment that puts your money to work, so that you can keep up with the evolving needs of your workplace, staff, and operations.

When deciding on any investment option for yourself or your business, connecting with an advisor will help bring clarity to your financial goals and the best options to meet them.