Why Having Access to Capital Is More Important Than Rate of Return
In the world of business and personal finance, a common debate centers around what matters more: the rate of return on your investments or simply having access to capital itself. While many investors obsess over maximizing returns, the reality is that access to capital—having money available when you need it—can often be far more valuable than chasing the highest possible rate of return. This blog post will explore why this is the case, provide real-world examples, and inspire you to prioritize liquidity and access in your financial strategy.
Understanding Rate of Return vs. Access to Capital
Before diving deeper, it’s important to clarify these two key concepts:
- Rate of Return: This is the percentage gain or loss on an investment over a specific period. Investors often use it to compare the profitability of different opportunities. In finance, the required rate of return is the minimum return an investor will accept for owning a company's stock or asset, compensating for the risk involved
- Access to Capital: This refers to how easily you can obtain money or resources for your business or personal needs. It’s about liquidity, flexibility, and the ability to act quickly when opportunities or emergencies arise
While a high rate of return is attractive, it’s only beneficial if you have the capital available to invest in the first place. Access to capital gives you the power to seize opportunities, manage risks, and navigate uncertainties—something a high rate of return alone cannot guarantee.
Why Rate of Return Isn’t Always King?
While a high rate of return is appealing, it comes with trade-offs:
- Liquidity Risk: High-return investments are often less liquid, meaning your money is tied up for longer periods.
- Access to Capital: This refers to how easily you can obtain money or resources for your business or personal needs. It’s about liquidity, flexibility, and the ability to act quickly when opportunities or emergencies arise.
- Risk of Loss: Investments with higher returns typically carry higher risk. If you need to access your money during a market downturn, you may be forced to sell at a loss.
Example:
Consider an investor who puts all their savings into a private equity fund promising a 15% annual return. While the potential payoff is high, the investment is locked up for several years. If the investor faces a personal emergency or a once-in-a-lifetime business opportunity, they may not be able to access their funds in time.
What are real-life examples showing the importance of liquid capital over high returns?
Real-life examples vividly illustrate why having liquid capital—ready access to cash or easily convertible assets—is often more valuable than chasing high returns from illiquid investments:
1. Business Operations and Cash Flow Management
Example: A small business owner keeps a portion of their profits in a business checking account rather than locking everything into long-term investments. When a major client delays payment and payroll is due, the owner uses these liquid funds to pay employees and cover essential expenses. Without this liquidity, the business might have to take out a high-interest loan or delay payments, risking employee morale and business reputation.
Why it matters:
Liquid assets ensure smooth day-to-day operations, allow businesses to meet obligations, and provide flexibility to respond to unexpected events, such as sudden drops in revenue or urgent equipment repairs
2. Personal Emergency Funds
Example: A family maintains an emergency fund equivalent to six months of living expenses in a high-yield savings account. When the primary earner unexpectedly loses their job, the family uses this liquid capital to pay bills, buy groceries, and avoid taking on credit card debt. This prevents financial distress and avoids selling long-term investments at a loss during a market downturn.
Why it matters:
Emergency funds made up of liquid assets act as a financial safety net, protecting individuals from the need to liquidate assets at unfavorable times or incur high-interest debt.
3. Seizing Investment Opportunities
Example: An investor with liquid capital learns about a rare opportunity to buy a property at a significant discount due to a distressed sale. Because the investor has cash readily available, they can act quickly and secure the deal before others. In contrast, another investor whose funds are tied up in long-term investments or retirement accounts cannot participate, missing out on substantial potential gains.
Why it matters:
Liquid capital provides the flexibility to capitalize on time-sensitive opportunities, such as discounted real estate or stock purchases, that can yield higher returns than typical investments—if you can act fast.
4. Managing and Paying Off High-Interest Debt
Example: A middle-class individual chooses to use their liquid savings to pay off high-interest credit card debt rather than investing in a retirement account. By doing so, they effectively earn a "guaranteed return" equal to the interest rate on their debt (often 15–25%), which is much higher than the potential return from most investments. This approach improves their cash flow and financial security immediately.
Why it matters:
Paying off high-interest debt with liquid capital provides a higher, risk-free return and frees up future cash flow for other goals.
5. Market Volatility and Economic Downturns
Example: During a market crash, investors with significant liquid assets can cover their living expenses without selling stocks or real estate at depressed prices. In contrast, those who have all their money in illiquid investments may be forced to sell at a loss to meet financial obligations.
Why it matters:
Liquid assets act as a buffer against market volatility, allowing individuals and businesses to avoid locking in losses during downturns.
6. Car or Large Purchase Planning
Example: A family planning to buy a car in the next year keeps the necessary funds in a liquid account. When the right deal comes along, they pay in cash, avoiding interest charges and potential loan fees. If they had invested the money in a long-term, high-return asset, they might have to finance the purchase at a higher cost or miss out on the deal entirely.
Why it matters:
Maintaining liquid capital for planned large purchases ensures you can avoid expensive financing and act quickly when opportunities arise.
These real-life examples underscore the practical importance of prioritizing liquid capital over high returns. Having ready access to funds provides security, flexibility, and the ability to act decisively—whether for emergencies, opportunities, or everyday needs.
The Psychology of Access to Capital
Access to capital isn’t just about numbers—it’s about confidence, security, and peace of mind. When you know you have funds available, you’re more likely to take calculated risks, pursue ambitious goals, and weather setbacks.
Example:
An entrepreneur with a solid cash reserve is more likely to invest in marketing, hire top talent, or explore new markets. This proactive approach often leads to greater success than playing it safe and focusing solely on maximizing returns.
How to Prioritize Access to Capital?
Here are practical steps to ensure you always have access to capital when you need it:
- Build an Emergency Fund: Aim to save 3–12 months’ worth of living or business expenses in a liquid account.
- Diversify Your Investments: Balance high-return, low-liquidity investments with more liquid assets.
- Establish Credit Lines: Open business or personal lines of credit before you need them.
- Monitor Cash Flow: Regularly review your cash flow to anticipate needs and avoid surprises.
- Plan for Growth: Set aside funds specifically for growth opportunities, such as new product launches or market expansion.
The Cost of Not Having Access to Capital
When you lack access to capital, you may be forced to:
- Take on High-Interest Debt: Credit cards, payday loans, and other expensive financing options can quickly erode your financial health.
- Miss Out on Opportunities: You may have to pass on lucrative deals, partnerships, or investments.
- Sell Assets at a Loss: In emergencies, you might have to liquidate investments at unfavorable prices.
Example:
- A real estate investor who doesn’t have access to capital may miss out on a discounted property because they can’t secure financing quickly enough. Meanwhile, a competitor with ready funds can close the deal and reap the rewards.
Unlock Your Financial Potential
Now that you understand the power of access to capital, it’s time to take action. Don’t let the pursuit of high returns blind you to the importance of liquidity and flexibility. Start building your emergency fund, diversify your investments, and establish credit lines today.
Imagine the opportunities you could seize, the risks you could manage, and the peace of mind you could enjoy—simply by having access to capital when you need it. The choice is yours: will you prioritize access to capital and unlock your full financial potential?
Final Thoughts
Access to capital is the foundation of financial success. While rate of return is important, it’s only one piece of the puzzle. By prioritizing liquidity and flexibility, you empower yourself to seize opportunities, manage risks, and achieve your goals. Don’t wait—start building fund with access to capital today and experience the difference it can make in your business and personal life.
Stay In The Know
Get valuable information delivered right to your inbox