Advantages of Fixed Deposits for Small Business Owners

Starting and expanding a small business requires financial support. As an entrepreneur, you may be wondering about the best financing options available to you. One such option that can provide stability and growth opportunities for your business is Fixed Deposit (FD). In this blog, we have explained the advantages of Fixed Deposits for small business owners.

1. Stable Returns and Precise Forecasting 

One of the key advantages of FDs for small business owners is the assurance of stable returns. When you open an FD account, you deposit a specific amount of money for a predetermined period at a fixed interest rate.  

This fixed interest rate allows business owners to precisely forecast their returns over the duration of the deposit.  

2. Liquidity Management and Capital Use Optimisation 

Business owners can improve cash flow by staggering their FD investments. This means setting up several FDs with different maturity dates, so funds become available at regular intervals. The strategy is commonly termed as FD Laddering.

This approach avoids large, lump-sum withdrawals and ensures access to money when needed. Additionally, by reinvesting the matured FDs or using the funds for business growth, owners can better manage their capital and support expansion. 

3. Diversification and Risk Reduction 

Diversifying investments helps reduce risk. Including Fixed Deposits (FDs) alongside assets like equities, bonds, or mutual funds enhances overall portfolio resilience. Unlike market-linked investments, FDs protect the principal from fluctuations, making them ideal for risk-averse entrepreneurs.  

Investing in FDs safeguards capital from market volatility and economic uncertainties, ensuring financial stability. 

4. Tax Benefits 

FDs also offer tax benefits as the interest income is subject to standard tax rates.  

One such FD tax exemption is the deduction on FD interest available under Section 80 TTB of the Income Tax Act. According to this provision, senior citizens (individuals aged 60 years and above) are eligible for a deduction of up to ₹50,000 on the interest earned from their fixed deposits in a financial year.  

Timing FD maturities and withdrawals strategically can help business owners manage tax liabilities and maximise after-tax returns. 

Let’s consider an example to understand the benefits of fixed deposits for small business owners - 

Scenario:  

a) Mr. Rao runs a small IT services firm and wants to ensure that he has sufficient cash flow to cover his operational expenses during slower months.  

b) He decides to invest ₹8 lakhs in an FD with at an interest rate of 8%.  

c) This fixed deposit acts as a buffer and ensures that he has a steady inflow of funds even when business is slow. 

d) By using FDs in this way, Mr. Rao maintains financial stability, reduces stress from cash flow fluctuations. He can focus on growing his IT services firm without worrying about short-term cash shortages.