Invest With Interest

It’s curious that builders who would argue with a subcontractor or supplier over a fractional cent per square foot for the cost of buying or installing drywall would leave large sums of cash in bank accounts that yield little or no interest. It’s curious because every additional dollar earned from interest drops right to a construction company’s bottom line as an additional dollar of gross profit.

Checking accounts offered by some banks as “business-friendly” are exactly the opposite. They might include charges per check written or per deposit, and little or no interest on account balances. And balances held by builders, even for the short term (i.e., up to 90 or 180 days), can be substantial.

As interest rates fluctuate daily, all interest-rate shopping should be done the same day. Start with your existing bank: How much interest is earned on funds kept in the company checking account? How much interest is earned on savings or money market accounts? If money is kept in a savings or money market account, does it automatically transfer to the checking account if there is an overdraft? What is the interest rate on 30-, 60- and 90-day certificates of deposit?

Next, phone a regional or national brokerage house. Ask for its current rate (usually measured as the yield for the past seven days) on money market accounts. Many brokerage houses have a two-tiered money market system, one for less than $20,000 and a second, slightly higher rate for $20,000 or more, so get the rates for each. Brokerage accounts also typically come with check-writing features, allowing funds in a money market account to be accessed easily.

Typically, funds committed for slightly longer periods of time receive slightly higher interest rates. While banks might try to entice you with certificates of deposit, compare those rates with the rates for commercial paper. Commercial paper represents loans to some of America’s largest corporations for short periods of time (as little as seven days). While commercial paper typically is bought through a brokerage house, watch the credit rating of the company to which you are loaning. While companies with lower credit ratings have to pay higher interest rates, lower ratings imply credit risk.

Probably the least-used way to achieve higher short-term interest rates is through the use of short-term bond funds. These funds trade daily, and their fluctuating price (net asset value) depends on interest rates. But their returns can be significantly higher than those offered by checking accounts, savings accounts, CDs, etc. The potential drawbacks? Your principal is at risk, especially if interest rates suddenly change; load funds will immediately cost you principal (so only no-load funds should be used); and higher fund fees take a bite out of your return. But in a stable interest-rate environment, short-term bond funds are worth a look. Let an investment professional guide you down this path.

Stan Ehrlich can be reached by e-mail at sfehrlich@rcn.com.