If you reduce your current assets by your current liabilities you can quickly and easily determine your fixed assets. The higher the balance you have in current asset the greater your ability will be to meet your debts. However, the higher your current assets are the less your return will be on total assets. The reason for this is that fixed assets generate a higher return than do current assets.
Fixed assets make up the basic structure of a business. If you have a profitable business, you would have reason to believe that you would see a higher return on machinery, for example, than you would on such assets as marketable securities, which usually come to less than the overall cost of capital. There is a risk-return trade-off because current assets represent less risk with lower return. Along these same lines, if you finance with current liabilities rather than with long term debt you would typically see lower cost but greater liquidity risk. So simply put, the greater the maturity of your debt is, the more uncertain the cost will be. Usually, the greater the uncertainty of cost is, the greater the cost will be.
So what approach should you use for financing assets? Some executives believe it is better to use a hedging approach for financing assets. In this way assets are being financed by liabilities of similar maturity. The thinking here is that adequate funds will be available to meet the debt when it comes due.
However, if you sell products or services directly to consumers, and have assets in the form of consumer receivables, or consumer contracts (retail installment contracts), and those contracts are performing, there is a possibility that you might want to consider selling those assets (consumer notes) to generate operating capital.
There would be a fee associated with the sell of these consumer contracts. This fee is generally known as a discount. In a certain sense, this process could be viewed as a form of factoring. The reason it could be viewed as a form of factoring, is because it involves the sale of receivables. In this case, the receivables may be in the form of retail installment contracts, for example.
At the same time, it is a straight-forward way to provide financing for your creditworthy customers, as well as for your subprime customers who might not otherwise be able to acquire your products or services.
There may be a feasible way whereby you can sell an asset (in the form of a consumer receivable) to create working capital to grow your business, without incurring debt to achieve your goals.
Access Funding Center, Inc. provides a consulting service to assist you in determining whether or not it would begin to make sense for you to consider this funding approach.
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