Liquid holdings are of great value to businesses and are important for day to day operations as well as the not so usual situations. Less liquid assets have their own value too. In today’s business scenario, there is however, a trend to increase liquidity in businesses and this trend seems to be here to stay.
We come across many business owners and strategists who emphasize on the need to understand how much of liquidity is healthy. Some believe that it’s very advantageous for a business to maintain high liquidity while many others believe in it not so much. The truth is that this is something that varies a lot with the nature of the business. For example, a construction company might end up increasing its operating expenses too heavily if all their equipment is on lease. However, a real estate agency might benefit realty by keeping maximum liquidity that they could avail. This further, could change from company to company and the essential thing here, is to understand how liquidity can be increased or decreased, when it can be more valuable or less valuable and ultimately use this information to get advantage of the right amount of liquidity for your business.
Cash is the Most Liquid Asset
Cash in today’s business word is a slightly broader term. When you have money that is readily available for any business need and can seamlessly be utilized, it’s simply called cash – be it physical notes or instantly available/transferrable money in an account. What your business can use to settle liabilities instantly is your liquid asset and that’s exactly what we refer to.
Cash equivalents also exist. These are investments with short term maturities which also can be withdrawn quickly before the time of maturity if needed. US Treasuries and bonds, mutual funds, stacks and other marketable securities are examples of cash equivalents.
Leasing vs Purchasing
One of the most common ways in which modern businesses are maintaining healthy amount of liquidity, is by choosing lease over purchase. This could mean equipment, real estate, vehicles and certain other assets of high value.
The business decision of choosing lease over purchase has both short and long term effects and always benefits from strong analysis and planning.
We found a crisp and short article for you, if you’d like a little help with the choice.
Loans for Temporary Liquidity Requirements
When a business is in sudden need for liquid cash for any purpose – emergencies, unforeseen expenses related to an ongoing project, or so on, if there is a sudden need for added liquid capital which is not available, one option could be to liquidate assets. The better choice in many cases, would be to avail a loan that can address exactly this need and repay the amount (which comes with added interest). Frequently, the business owner/management finds that paying an added interest is a better choice than losing a significant asset.
Working capital loans or liquid capital loans are loans that are designed to help businesses with added funds. Since these funds are mostly intended to be a replacement for liquidation of assets, they essentially need to be designed for quick approvals and transactions. This relatively new form of a business loan, is seldom available from banks and conventional lending companies. Some modern independent lending companies like Business Advance Lenders, which understand the needs of the current business environment, offer such loans. These lenders do not expect the borrower to mention the reason for borrowing the loan or to prove where the loan amounts are being used, which is very in such a situation, is essential for multiple reasons.
Do Companies always need High Liquidity?
Having a low liquidity is an easy route to financial suffering of a company and many times in history, it’s been the sole cause or the root cause leading to bankruptcies. That said, having too much of liquidity can mean that funds are not being used to their fullest. For instance, excess cash capital could easily hint of a healthy potential of growth in scale, which could be of much more value to an organization versus having too much of cash stuck as cash, without any significant growth or returns on it.
There needs to be a right amount of liquidity ratio that management and business owners need to ascertain. This figure may not need to be static. Many companies grow well maintaining dynamic liquidity ratios that could change with scale, seasonality, trends, and a lot more. There are undoubtedly times when a business just needs to have more available liquid funds and in certain scenarios, planned correctly, a loan for added liquid capital can also be the right choice. Ultimately, it is hence an integral and inevitable task for the management to strategize the right amount of liquidity that the business needs and what is the best way out in exigencies that require added liquidity.