Managing Surplus Cash: Paying Debt or Investing?

Effectively managing surplus cash requires a certain tact and an understanding of the impact it can have on long-term financial stability and wealth growth. As an entrepreneur, you’ll often have to choose between investing surplus funds or repaying your company’s debts, and taking a number of factors into account, including interest rates, tax considerations, your risk tolerance and overall business strategy, will help you make the right choice. Below you’ll find some considerations to help you make the right decision at the right time.

Before you decide whether to reduce your company’s debt or invest, you need to assess your overall financial situation. This includes reviewing your cash flow, existing debt obligations, potential investment opportunities, and long-term financial objectives. This assessment ensures that surplus cash is truly available for any of these strategies.

Every business must maintain sufficient liquidity to cover operating expenses, unforeseen costs, and future opportunities. Assessing your cash flow needs ensures that surplus funds are actually surplus and not needed for short-term obligations.

Ask yourself the following questions:

• Do I have a safety net? Keep at least 3–6 months of operating expenses in reserve.
• Are there growth opportunities ahead? Expansion, new hires, or technology upgrades may require reinvestment.
• Does my industry have seasonal cycles? Ensure funds won’t be needed for fluctuations in revenue or unexpected downturns.

Not all debts are created equal. Some debts, such as high-interest loans or lines of credit, can be financially burdensome, while others, such as tax-deductible business loans, can be advantageous. When reviewing your debts, consider:

• What’s my highest interest debt? Paying off high-interest loans first reduces financial strain.
• Are my loans flexible? Some debts come with early repayment penalties, while others allow strategic refinancing.
• Do my loans offer tax advantages? Some business loans have tax-deductible interest, which can make keeping them a smarter move.

By carefully assessing your cash flow, debts, and financial priorities, you’ll be better positioned to make a strategic decision that will support both short-term business stability and long-term wealth growth. Don’t hesitate to seek the help of experts in wealth management, accounting, and taxation to carry out this exercise, which can be more complex in certain situations.

Now that you have a clearer picture of your debts and financial obligations, you have two main options: repay your debts or invest in your business. Both options have significant advantages and depend on factors such as interest rates, tax implications, expected return on investment and your company’s legal structure.

Paying off your debts can offer immediate financial security by reducing the company’s financial obligations and exposure to economic downturns. It can also free up cash for greater financial flexibility, in both corporate and personal finances.

What’s more, paying down high-interest debt offers a risk-free return equal to the debt’s interest rate. For example, eliminating a business loan with a 7% interest rate equates to a 7% return on investment.

Finally, a debt-free company has greater solvency and strategic flexibility when seeking future financing.

Investing surplus funds instead of using them to pay down debt can generate better long-term returns. For example, if the investment can earn a higher return than the interest rate on your outstanding debt, it may make more sense to invest your excess cash.

Additionally, some business investments, like IPPs, corporate-class investments, and dividend-paying stocks, offer tax benefits that can enhance returns. If you’re a sole proprietor, using your surplus cash to diversify your wealth outside your business – through stocks, real estate, RRSPs or TFSAs – may also be a good idea. It can help improve your financial security and reduce your dependence on your business.

Finally, reinvesting in the growth of your business, whether through expansion, technology or talent acquisition, can increase your revenues and enhance the value of your company.

For many business owners, a combination of both strategies—paying down debt while making strategic investments—delivers the best results. This approach helps reduce financial risk while growing wealth.

“Paying down debt and investing are both excellent options for entrepreneurs with surplus cash. As wealth management advisors, we always favor a balanced approach based on their situation and objectives.” – Valérie Forget, Wealth Management Advisor at The St-Georges Group – Assante Capital Management Ltd.

A well-balanced hybrid strategy could include:

• Prioritizing high-interest debt: Paying off costly liabilities first while keeping lower-cost, tax-efficient loans.
• Investing in diversified assets: Allocating funds across business expansion, personal investment accounts, and market opportunities.
• Maintaining flexibility: Keeping a mix of liquidity and investments ensures you have financial security and room for future growth.

By working with a wealth management advisor, entrepreneurs can create a customized strategy that balances financial security, risk management, and long-term growth. In this way, they maximize their financial resources while positioning themselves for sustainable growth.

The St-Georges Group offers a wide range of services, such as cash and debt management, to help entrepreneurs make the right business and investment decisions. We offer expert advice on tax, investment, risk management and more to help you grow and protect your wealth. Contact us today to discuss a customized strategy that works for you.