7 Approaches An Entrepreneur Can Increase Liquidity
Liquidity refers to a company’s financial capacity to pay bills as and when such a need arises. Entrepreneurs should always ensure that their businesses have enough cash flow right from the start; to make sure that they do not rely on credit when faced with various expenses. An entrepreneur can use different means to increase liquidity; these include:
1. Unproductive Assets
Unproductive assets are not an uncommon thing in the running of any business, and they can be sold to recover the money and use those proceeds to improve the liquidity situation. Investments such as trustee services should be examined very carefully because they can be a risky business. As such, it is prudent to invest in assets that appreciate in value and are a source of revenue for the business.
2. Peer To Peer Lending
Entrepreneurs can look to close friends and family for some financial assistance when they fail to fulfill the eligibility criteria when requesting for a loan. Peer to peer lending is an open option worth lengthy considerations though it is a money-sourcing trend that has grown significantly over the years.
Besides close friends and family, entrepreneurs can also use the same avenue by getting funding from other companies that are willing to invest in their businesses; these type of lenders will expect to get some share of the earned profits. The peer to peer lending often has no precise terms and conditions; the loans are availed if and when both parts reach a contractual financial agreement.
Micro-lending facilities tend to offer financial assistance to small budding business owners. The cash extensions come at low-interest rates. Entrepreneurs can look to some of these lending facilities including those that offer their services online (such as PayPal) to secure some liquidity by getting small loans that they can use for various expenses such as buying inventory to get the business back on its feet.
Some non-backing institutions and cooperative societies offer loans that budding business owners can use to cater to their needs. However, there is are eligibility and qualification criteria followed and that required a well-informed handling to ensure there is a smooth loan application process and have the requested money approved in time.
4. Short-term Investments
Saving accounts can at times have some excessive cash that often starts to get gradually depleted by unconscious or unbudgeted expenditures. A good way that an entrepreneur can make more money for the savings is investing the money in various instruments that have a maturity of less than six months (options include the certificate of deposits and cash bonds). It is a sound option that ensures the money stays safe and earns interest and can easily be converted into cash when needed.
5. Account Payable
Entrepreneurs can avoid having all their cash tied at once when transacting business by negotiating with vendors and asking for longer account payable days. It is important to have a balance between the account payable and account receivable because it will help maintain the company’s liquidity.
6. Sweep Accounts
Sweep accounts earn interest on the available cash balance, and this can have the account viewed or turned into an interest bearing account. Entrepreneurs can open such account with various financial institutions and use these as an alternative source of the needed funds and change them back to operating accounts when needed.
7. Personal Finance
Entrepreneurs, when forming a company, can as well rely on their personal finances to help increase liquidity for their businesses. Well, this depends on their financial capacities when starting their businesses. Options such as student loans are open if the entrepreneur is still in college and can access such loans, which may come in handy on a rainy day.
It is crucial for budding business owners to plan adequately for liquidity in advance. It will help them avoid making wrong financial decisions such as selling long-term assets at a low price when faced with a cash crunch.