7 Ways an Entrepreneur Can Increase Liquidity
Liquidity refers to the capacity of the company to pay dues as and when needed. An entrepreneur should ensure there is sufficient cash because in the early stage of the business, there are a lot of expenses, where cash is needed and credit does not apply. There are a number of ways in which an entrepreneur can increase liquidity in the business:
Sweep Accounts – An entrepreneur can use the sweep account provided by several financial institutions. These accounts earn interest on the cash balance available in the account by transferring the fund into an interest bearing account. In case, you do need the funds, it can go back to the operating account.
Micro Lending – Micro lending facility is the best option for the small business owners, who want cash at low-interest rates. Various programs are offered by different online companies such as PayPal, fulfilling the need of immediate liquidity by offering small loans. These loans can be used in a number of ways such as buying inventory to resume the production.
Also, there are various cooperative societies and non banking financial institutions that lend money and make sure that those who need the funds get in time. There are some qualifications and eligibility criteria that you need to fulfill to make sure the loan process goes smooth and you get the loan in time.
Peer To Peer Lending – At times, you may not fulfill the eligibility criteria of a loan, and thus, your application gets rejected by lending institutions. But don’t worry; the peer to peer lending option is still open. This trend has grown significantly over the past years. There are various websites where thousands of lenders come together to fund a business, and get share in the profit earned by the company. There are no uniform terms and conditions, and once both the parties agree, you can avail the loan.
Short-term Investments – At times, we have excessive cash in the savings account, and it gradually starts depleting because we keep on spending it unconsciously. However, the idea should be to invest that money in various cash bonds, certificate of deposits and various such instruments that do not have maturity of more than six months. This will ensure that your money is safe and earning interest. Also, it can be converted into cash easily as and when the need arise.
Account Payable – It is always good to negotiate with the vendors, and ask for longer account payable days so that not all your cash is tied at once. An entrepreneur must always maintain a balance between the account receivable and account payable to ensure the liquidity is maintained.
Personal Finance – Some of you might have started the business in college, the time when personal liquidity is even more important. To ensure there is enough cash in hand, you can apply for a student loan to make sure the day to day operations is not stuck.
Unproductive Assets – Over the time, business collects a lot of unproductive assets that are of no use. Instead of storing these assets, it is better to sell them and recover the money. You must invest the money in the assets that generate revenue for the business, or appreciate in value over time.
Liquidity is important for the established companies, as well as, for the entrepreneurs who are just starting the business. Therefore, planning for it in advance is the best option rather than making wrong decisions, like selling a long-term asset in half the price, during a cash crunch.
About the Author:
Elena is a Finance Content Executive at CSB Hedge Fund Malta. She is a passionate blogger and an avid traveller. Outside of work she helps young adults get a better understanding of how they can stay out of financial troubles.