Invest excess liquidity. Avoid negative interest rates.

Invest excess liquidity. Avoid negative interest rates.

At a time of negative interest rates, excess liquidity in the form of cash holdings costs money. Many companies therefore need to rethink their liquidity management. Targeted investment of liquidity provides interesting alternatives to your bank account.

Excess liquidity in your bank account leads to additional costs

Companies that build up their liquid assets during good periods can often benefit from this later, as a precaution for when times are harder, for example, or to have immediate access to cash if a strategic opportunity arises unexpectedly. Because retaining profits is also a popular, time-honored measure in many SMEs.

However, the historically low interest rate situation means that many companies are facing a new challenge. They have to ask themselves what they should be doing with the cash holdings. Because if the capital simply remains in their bank account, negative interest rates will be debited above a certain threshold, thereby incurring additional, avoidable costs. That is why it pays to find alternatives to cash in the case of funds that are not needed for operations.

Optimize liquidity management with financial investments

Financial investments in business assets can offset the adverse consequences of negative interest rates. The starting point is to precisely define the company's excess liquidity. This depends on various factors, such as the liquidity requirements for general business performance, the distribution policy, the capital requirements for planned investments, or the necessary strategic and operating reserves.

The investment strategy can then be selected. Here, it is important to take account of the special characteristics of such investments, and the differences between these and private investments. Investment decisions in business assets should follow an internal investment guideline that takes business performance and the corporate objectives into account. In addition, it's important to observe extensive bookkeeping obligations for every transaction and pay attention to the differences in taxation between these and private investments. For example, capital gains in business assets are not tax free; on the other hand, losses carried forward can be offset against any profits for up to seven years.

Investments of excess liquidity differ from private investments

There are special requirements for investments of excess liquidity

Source: Credit Suisse

Choosing the right investment instruments for excess liquidity

When selecting the instruments for implementing the investment strategy, a number of points must be taken into account. On the one hand, they should be as secure as possible in order to avoid running unnecessary risks with business assets. On the other hand, it is important that they are as liquid as possible so that they can quickly be liquidated if necessary and converted into cash. Detailed advice helps to identify the best investment instruments for a company's specific situation and thereby to find the best solution for investing excess liquidity.

Three alternatives to cash holdings:

  • Currency transactions such as dual currency deposits are particularly suitable for companies operating internationally, as they not only eliminate the costs of negative interest rates, but simultaneously take the company's foreign currency requirements into account. The currencies used should match the company's needs in order to generate the maximum benefit.
  • Defensive funds take up little time for companies and help to compensate for the negative interest rates and achieve small returns with low risk over the medium term. Through these products, investors gain access to institutional investment opportunities that are not available to individual investors.
  • Individual mandate solutions and funds with mixed assets open up the full range of investment solutions to companies. Experts invest the excess liquidity flexibly based on the company's individual risk/return requirements. A strict, sustainable investment process is applied while taking various sources of return into consideration. This offers the opportunity to achieve returns with careful risk monitoring and thorough risk management.

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