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These days, small business owners find short-term investments an ideal option to finance their business and multiply productivity. For risk-averse investors, there are unlimited opportunities to grow money within a specific timeframe. Besides this, short-term investments are easily available to benefit businesses with an improved cash flow during emergencies. Let’s dig deeper into the following article to understand what is short-term investment in detail.
What are Short-Term Investments?
Short-term investments are financial instruments held for less than one year. Generally speaking, they are considered highly liquid and can be easily converted into cash. This way, short term financial instruments give investors easy and quick access to their invested funds in case any contingency arises. The key objective of short time investment is generating modest returns within a limited timeframe.
In contrast to long-term investments, investing for a brief maturity period brings low returns at low risk. Investors often opt for this investment to build wealth in the short term to meet their immediate or short-term financial goals and create money for their short-term expenses. Also, the high liquidity option helps them park surplus funds to build emergency funds that they can redeem whenever needed.
Importance of Short-term Investments for MSMEs
Working capital improves the MSMEs’ ability to meet their short–term obligations so they can continue their daily business operations even in difficult times. It helps them avoid falling into debt. However, managing surplus working capital is a challenge that MSMEs often face. In this scenario, short term cash investments aid them in generating money in the short run to meet the day-to-day business’s demands, such as purchasing inventory, paying salaries to employees, or clearing invoices of vendors.
These liquid investments feature high flexibility and the advantage of selling or redeeming at any time. This way, easy liquidity helps MSMEs meet their working capital needs, ensuring no risk to their principal amount when growing wealth in the short run.
Types of Short-Term Investments
So far you have understood the short term investment meaning for MSMEs. Understanding different types of short-term investments helps you make an informed decision if you are an MSME owner. Hence, know about the following short-term investment examples to limit risk exposure and achieve small financial goals:
- Invoice Discounting
Invoice discounting or bill discounting is one of the best short-term investments examples that help MSMEs improve their cash flow, ensuring they can meet their working capital needs without incurring debt. Banks and financial lending institutions often provide invoice discounting facilities to enterprises wherein they can sell their unpaid invoices in exchange for cash. As a result of this, they get a percentage value of the invoice directly from the bank to enhance the cash flow for long-term business survival. Subsequently, the bank asks for the payment from the customer at the billing’s due date.
For instance, if there is an outstanding invoice of ₹1,50,000, the bank may advance ₹90,000 upfront to the firm, and the remaining amount is paid when the customer clears their invoices, minus service fees. The major advantage of bill discounting is that it helps them bridge the gap between invoice generation and payment collection, ensuring improved working capital and accelerated productivity.
- Portfolio Diversification
Another popular short-term investment option for MSMEs is portfolio diversification which allows them to generate high returns by limiting their exposure to any one type of asset. The easy redemption policy in the event of losses helps them access the money in no time. Their disciplined approach and patience in investing in diversified short-term securities equip them with the capability to meet evolving market demands, such as cutting-edge technologies, consumer preferences, etc. It makes them resilient by lowering their vulnerabilities to economic downturns. In brief, the diversification mitigates risk in the portfolio.
A few popular examples of short-term investments are mutual funds and ETFs (Exchange Traded Funds) that feature the potential for higher returns in the short run, ensuring no participation in the stock market fluctuations. This way, enterprises can explore new business opportunities in the competitive market. The increased cash flow helps them innovate and meet diversified customer needs. Overall, investing in one of the portfolio diversification short-term fund examples is a wise decision.
- Digital Gold
With the ability to generate higher returns, digital gold has always been a coveted investment option for MSMEs. It is important to note that digital gold platforms replace traditional physical assets, ensuring enhanced flexibility, transparency, affordability, convenience, and zero security risk. If you are an MSME owner, looking for short-term investing options, consider buying virtual gold that helps gain appropriate financial worth in the short run.
However, you should choose reputable platforms that ensure secure transactions and provide real-time insights into the fluctuating gold prices. This way, they help MSME entrepreneurs like you make informed decisions regarding their short-term investments. The best part is that you can easily process digital gold assets into cash to meet working capital demands.
- Liquid Funds
Liquid funds are typically debt funds known for offering better returns than a regular short-term savings plan. They are one of the best fund options wherein short term investments are carried at the lowest interest rate risk. They allow investors to invest in fixed-income instruments with a maturity of up to 91 days. Some popular short term funds examples are government securities, treasury bills, money market funds, corporate bonds funds, floater funds, banking and PSU funds, commercial paper, etc. Their NAV or net asset value is calculated for 365 days. They offer a fixed income over their tenure, ensuring no risk of stock market volatility.
It is worth noting that MSMEs can easily withdraw the invested amount in the event of contingency. Their redemption process is accomplished within 24 hours and the money is initiated in the bank account without delays. Simply put, debt funds are highly liquid and flexible, carrying zero entrance and exit burden. Hence, low-risk MSME entrepreneurs should invest in them as they balance the ratio of debt and equity investments.
Advantages of Short-Term Investments for MSMEs
Here are some advantages of short-term investments for MSMEs that you should know of:
- Portfolio Diversification
Often, MSME entreprenurs deal with the deficiency of working capital to meet their business’s operational needs. Therefore, they are considered risk-averse investors who prefer growing wealth in the short run and without risk. Portfolio diversification is the best example of a short-term investment that allows you to allocate investment capital across diverse assets, ensuring minimum risk and higher potential. Its potential to generate high investment earnings may surpass the benefits yielded by the best short-term savings plan.
- High Liquidity
When comparing short-term and long-term investments examples, MSMEs manage their cash flow needs from the short-term instruments in a better way. Their investment in treasury bills, corporate bond funds, or money market funds helps them earn a good return on their excess cash. This way, they can improve cash flow to meet day-to-day operational demands within their organisations.
- Flexibility
Short-term investments offer flexibility, especially when the goal of MSME entrepreneurs is to grow money within a short period. The important takeaway is that they do not need to lock their money for decades to secure higher returns at low risk. Since the maturity period is short, they can easily utilize the earned returns to enhance business operations and promote growth. Further, it allows them to invest their surplus money whenever an opportunity arises.
- High Returns
With the right short-term investment, MSME owners can avail of promising high returns. Once they book their profits from short-term investments, they can again invest in other alternative options such as bill discounting to grow more profit. This way, short-term investment is a strategic way to generate money faster and smarter.
- Capability to Withdraw Money in the Event of Losses
Another advantage of investing for a short period is that MSME entrepreneurs do not need to hold their stocks during economic disruption. It aids them in avoiding loss-making situations. Short-term investments make them more agile in multiplying invested capital within a limited time.
5 Key Benefits of Short-Term Finance for MSMEs
Here are the five key benefits, focusing on short-term finance or loans for MSMEs:
- Quick Access to Funds
By applying for short-term financing options, MSMEs can immediately access funds required for day-to-day operational needs. This way, they can stay afloat during disruptive market conditions or other challenging times. Financing institutions ensure small businesses can procure cash flow without stringent eligibility barriers.
- Lower Interest Rates
Financial institutions offer attractive and affordable interest rates when financing MSMEs, ensuring small businesses can easily borrow and repay loans. This way, banks and other financial institutions help them purchase inventory, manage expenses related to wages, etc.
- Reduced Financial Risk
Contrary to investments in the stock market to attain higher returns, the option of small finances for MSMEs is less risk-oriented. This significant advantage makes it highly preferred among small business owners like retailers, shopkeepers, and Kirana store owners. In short, borrowing money is an excellent alternative for those looking to access quick cash without risk.
- Improved Cash Flow Management
Term loans and equipment financing options enable businesses to scale their operations and improve cash flow. These small financing options bridge the gap between cash flow and payment collection, allowing small businesses to have liquidity to expand business into new markets, hire new employees, and manage inventory.
- Flexibility and Convenience
For eligible business owners, lending institutions provide tailored repayment plans. With the flexibility and convenience they offer, short-term finances help small businesses meet their financial demands. The best part is that the customised repayment plans help them repay the loans within the due date.
Top 3 Essential Tips for MSMEs to Secure Short-Term Finance
To secure short time investments, MSMEs must consider the following top 3 essential tips:
- Maintain a Good Credit Score
A good credit score denotes timely payments of existing debts and no failure to repay the loan. Maintaining a good credit score can enhance the potential of securing the desired loan amount at an affordable interest rate.
- Prepare a Solid Business Plan
A comprehensive business plan aids lending institutions in comprehending your business’s objectives, plans, financial projections, opportunities, threats, etc. So, prepare a solid business plan that can impress lenders to provide you with tailored loan options.
- Shop Around for the Best Rates and Terms
Next, ensure you know how to bargain with lenders for the best interest rates. The more promising the business growth, the more easily you can convince your favourite lender to lend you money on your preferred rates and terms.
