What is Liquid Capital?

Are you thinking about buying a franchise? If so, you’ve likely come across the term “liquid capital.” Franchisors typically require prospective franchisees to have a certain amount of liquid capital before signing an agreement. 

In short, liquid capital is the money you have on-hand. More specifically, it refers to cash or assets that are readily available for use. It’s important to understand that liquid capital is not the money you use to pay your bills and put food on the table. Rather, it is cash that you could invest in a business while still being able to afford daily life. 

A few other terms used for liquid capital include: fluid capital, liquid assets, quick assets, cash required, and realizable assets.

Examples of Liquid Capital  

Are you ready to get started on your business plan, but wondering if you have enough liquid capital to buy a franchise? While each franchise’s requirements will vary, consider the following types of liquid capital when determining how much you have. 

Money in the Bank 

The simplest form of liquid capital is the money in your bank account that you could use to invest. It’s important to understand the distinction between liquid assets and non-liquid assets when evaluating how much cash you could potentially have in the bank.

Liquid assets – These assets can be easily sold and converted to money in the bank, like mutual funds or stocks. 

Non-liquid assets – These assets don’t put money in the bank right away, meaning you can’t include them when calculating your total liquid capital. Examples include: real estate and investment accounts that you can’t immediately access.  

Mutual Funds  

Mutual funds provide the opportunity to invest in a diversified portfolio of stocks, bonds, or other securities. As investors purchase shares, the mutual fund company has the resources to purchase securities for the fund’s portfolio. The performance of the securities are key to determining the shares’ value. Joining a mutual fund comes with a fee, but it offers access to experienced professional investment managers who also make decisions regarding which securities to purchase for the fund. A mutual fund is ideal for people who are new to investing or don’t have the time to manage their investments. They are considered liquid capital because investors have freedom to sell their shares and quickly receive their payout.  

Money Market Funds  

Money market funds are a type of a mutual fund that invests in low-risk securities such as commercial paper, Treasury bills, and certificates of deposit. Professional investment managers focus on adding securities with less than one year maturity to the fund to minimize the risk of fluctuations in interest rates. While investing in a money market fund is low-risk, it also has a low-return. However, it is considered liquid capital because investors can sell their shares and receive their money within a few days.   

Stocks and Other Marketable Securities  

Marketable securities are financial assets that are bought or sold in a public market, such as a stock exchange. In addition to stocks, other common types of marketable securities include bonds, Treasury bills, commercial paper, certificates of deposit, mutual funds, and exchange-traded funds (EFTs). Some of these investments fluctuate in value and carry higher risks, but the ability to sell shares quickly without losing significant value makes it a reliable source of liquid capital

Savings Accounts  

A savings account is another low-risk and low-return place to hold money until it’s needed for an emergency, planned purchase, or future financial decision. The funds earn a small amount of interest over time, and they’re generally easy to withdraw making it another source of liquid capital. 

Why You Need Liquid Capital

Liquid Capital FAQs  

What is the difference between investment capital and liquid capital?

Investment capital, also called financial capital, is the money used to make an investment. Whether that be purchasing stocks, bonds, or shares of a mutual fund or a business purchasing the necessary equipment for producing goods or offering services.  

In some cases, liquid capital is used as investment capital. For example, if you save money in an account to eventually purchase a new laptop, then the money is simply liquid capital. However, if you decide to use that money to buy a franchise, then your liquid capital is also investment capital. 

What is the difference between working capital and liquid capital? 

Working capital and liquid capital work hand-in-hand. Working capital “is the difference between a company’s current assets and current liabilities” (Investopedia). Essentially, it is the liquid capital that a business has available to pay for its short-term obligations such as daily expenses and rent. 

What type of assets are non-liquid capital?

An asset is considered non-liquid, or illiquid, when it can’t be quickly converted to cash. A few examples of these types of assets include: 

  • Equipment
  • Real estate
  • Vehicles
  • Art
  • Collectibles

It is possible to sell and therefore liquidate these assets if you want to have the cash in-hand. However, they are still considered non-liquid assets because the process of selling them will likely take considerable time or negatively affect the item’s value. 

In some cases, the liquidity of an item depends on the circumstances. For instance, a business’s inventory is usually considered a non-liquid asset, but if the inventory can be quickly sold at a profit, then it is liquid.  

When a franchise says it requires liquid capital, what does that mean?

When a franchise says it requires liquid capital, it means that the potential franchisee must have a minimum amount of cash or other liquid assets in order to qualify for the franchise opportunity.

Why do franchises care about liquid capital?

Requiring a certain amount of liquid capital sets franchisees up for success, which benefits everyone all around. Liquid capital ensures that franchisees can pay for the various expenses that come with owning a franchise including: 

  • Franchise fees
  • Lease payments 
  • Construction costs 
  • Utility deposits 
  • Equipment down payments 

Additionally, while owning a franchise can be a reliable source of income, it can take several months or more before a new franchise becomes profitable. In the meantime, it’s important to have available funds to keep the franchise running. Ideally, you will have sufficient liquid capital to support business operations for a few months when starting a franchise. 

What is the difference between liquid capital, net worth, and total investment? 

While liquid capital is the amount of cash readily available, net worth refers to the “value of the assets a person or corporation owns, minus the liabilities they owe” (Investopedia). An individual’s net worth provides a more comprehensive picture of the financial status. In addition to liquid capital, franchises often require a minimum amount of net worth before buying a franchise. 

The total investment is the amount needed to purchase the franchise. One way to look at it is that liquid capital is the cash you need to pay upfront, like a deposit, but the total investment number accounts for the full cost of the franchise. 

How can I calculate my liquid capital and net worth?

If you want to know how much liquid capital you have you simply perform the following equation: 

  • On-hand cash + all liquid assets short term debts = total liquid capital available 

You can also use a “quick ratio” or “acid test ratio” to indicate the status of your liquid capital: 

  • On-hand cash + all liquid assets / current liabilities = the ratio of liquid capital compared to current liabilities 

You can calculate your net worth with this simple formula:

  • On-hand cash + all assets (liquid and non-liquid) current liabilities = total net worth 

Can you purchase a franchise with no liquid capital? 

While it is important you don’t get yourself in a financial pickle, there are some options for purchasing a franchise if you don’t have sufficient liquid capital. These include: 

While all of these could be a good option depending on your circumstances, here are a few things to consider: 

Keep in mind that franchisor financing and bank loans will likely require you to have exceptional credit. 

Getting a loan from the SBA is a good option for those with low credit, but it is a time-consuming process and comes with limitations on how you can use the funding. 

Home equity loans risk your personal finances should you default on your loan. 

ROBS will require you to have a 401(k), 403(b), or an IRA account.

Working with a partner who can finance the project means you will give up partial control of the business. 

Liquid Capital Is Key to Franchise Ownership – Let’s Talk  

Are you ready to get started with franchise ownership? Not sure how much liquid capital you might need? Let FranNet help at no cost to you! Our expert franchise consultants will walk you through the entire process and help you understand all of your options regarding liquid capital requirements. We’ll make it a point to know your unique needs and abilities so that we can match you with the perfect franchise. Reach out today to schedule your free consultation!  

May 14, 2023