Here are five strategies entrepreneurs can use to build financial liquidity.
With the latest technological developments, the definition of entrepreneur has changed.
No longer is the term limited to professionals in suits; college students can launch successful companies from their dorm rooms and garage apartments.
Millennial entrepreneurs and solopreneurs have redefined the traditional business models.
However, some things remain constant; no matter what kind of business you own, liquidity is essential for your continued growth and personal security.
What Is Liquidity?
If there was a sudden emergency, such as the loss of a major client or a surprise medical bill, how quickly you could find the money or convert your assets into cash determines your current liquidity. We often trick ourselves to think we are doing well if our assets outpace our debts; if we have a positive net worth, we think we are in great shape.
Unfortunately, that is not always the case. If a sudden issue or opportunity comes up, your ability to use cash is essential for your financial well-being. As an entrepreneur or CEO, cash is always king.
To build your liquidity ratio, you need to increase the amount of money you have available and decrease your debt load. As a general rule, you should aim to have three to six months of living expenses saved in a bank account that you can easily access. Reducing debt allows you to save money that would have been spent on interest payments, bolstering your reserves.
Liquidity planning often falls off the priority list. You have dozens of things competing for your time that all needs to get done to keep your company moving forward. However, your financial position needs to be secured to stabilize your business, and this includes your personal finances. If you do not have things in order, your business will be in trouble.
Depending on your individual situation and unique needs, below are five strategies to build your liquidity:
Small Business Loans
It has gotten harder and harder for small businesses to get a loan from a traditional bank, especially as a young entrepreneur. You do not have the credit history, and your business has not been around long enough for banks to approve you. This issue has been recognized by many companies who are changing the way small businesses can get the cash they need.
SmartBiz streamlines the loan application process and offers longer terms and lower interest rates, giving entrepreneurs attractive loan options. While traditional loans can take months to process, SmartBiz will get you the funds when you are approved in as little as seven days.
OnDeck is another company that provides loans to “risky” candidates, like young entrepreneurs with a low personal credit score. They offer short-term loans, three months to two years, and only requires that your company has been in business for at least one year.
There are times as an entrepreneur where you’ll have an opportunity to expand and grow your business significantly, but that opportunity costs money you just don’t have. That is where micro-lending comes in. Through programs like PayPal’s Working Capital, you can get small loans of $500 to $15,000 to use for what you need, like expanding your inventory.
You can also get a microloan up to $50,000 through the U.S. Small Business Administration if you meet their qualifications. Because the loans are made by local non-profit, community-based organizations, the terms tend to be very favorable.
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If you launched a business while in college, personal liquidity is even more important. You likely carry student loan debt and have little savings, even if your business is doing well. Getting rid of those student loans should be your number one priority.
If your interest rate is keeping you from being able to pay them off, look into student loan debt consolidation or refinancing. LendEDU can help you refinance your loan with a much more attractive interest rate, so your payments go more to the principal and the loan gets paid off more quickly.
If you do not meet the qualifications for a traditional bank loan, such as a minimum time in business, you still have options. Peer-to-peer lending has been a growing trend over the past few years, giving loans of all sizes to entrepreneurs like you. With thousands of investors available on sites like LendingClub and Prosper, you are more likely to get the money you need at terms you can handle.
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Ladder Your Investments
If you do have cash on hand but can’t stand the thought of it sitting in a savings account making poor interest returns, laddering your investments can be a useful solution. Whether you want to invest your cash in bonds, certificates of deposits (CDs) or increasing your inventory, laddering your cash by spreading costs and investments over varying time spans and interest rates, you can maintain continuous access to money while making more in interest than you would in a savings account.
This strategy keeps your money from being tied up all at the same time, so you can use the cash if something unexpected pops up. For example, if you had $12,000 to invest, you could create a $1,000, 12-month CD every month for a year. By the end of the year, the first CD will be due, so you still have access to money while earning higher interest rates.
Liquidity is essential for both individuals and companies, particularly for entrepreneurs growing their businesses. You may have accumulated wealth regarding assets, but you could end up in trouble if a situation arises and you cannot turn those assets into cash quickly.
While it may seem to be challenging, by reducing your debt and expenditures and improving your cash flow, you can improve your liquidity and financial stability for both your company and yourself. Having the cash on hand empowers you to take advantage of opportunities that arise and prepares you to handle any surprises.