How do we utilise gold as working capital for business?

Have you noticed that the ladies who run the business probably wear jewelleries when you visit a local market? We might think that they wear them as decorative ornaments, but there is more to that. These ornaments are meant as long-term savings, emergency funds, and, most importantly, working capital for their business.

If there is an urgent need for cash, they will not hesitate to pledge their gold jewelleries at Ar-Rahnu for a quick loan. The amount would be returned within the stipulated time duration. And they will get their gold jewelleries back. In other words, their working capital is not kept in cash but essentially in gold.

Capital ‘leakage’ issue solved

Typically, the problem around small business owners is that their capital is being used up for other purposes, usually for personal reasons. The amount may seem minor at first, but a significant amount of money would surprisingly 'disappear' when done repeatedly.

When converted into gold, the capital is 'locked' in the form of gold, thereby being protected. When kept as cash, the tendency of using business capital is for personal usage is very high. In addition, the emotional factor associated with gold would kick in and consequently encourage to save more gold rather than spend it away.

Short term loan gets fully settled.

Those running small businesses do not get financial assistances quickly from the bank simply due to the short duration of the projects. Bank loans are designed usually to be more than two years (minimum). This duration is not feasible to cater to the needs of small business owners. Even if they opt for such loans and decide to settle the amount earlier, the fees associated would result in a loss because the early phase of loans is usually meant to cover the interests.

Alternative funding sources

At this age and time, there are alternative sources of financial assistance such as peer-to-peer lending, short-term financing, etc. Again, the associated fees and the rates charged upon them may not be sustainable. Moreover, different ad hoc projects might undergo changing budgets. This poses a challenge to translate them into the cost of the product. However, with gold, we would know precisely the costs involved, which facilitates calculating the cost of products.

Ease of monitoring capital progress

Small business owners do not engage professional accountants to monitor their profit or loss. They rely on themselves practically. If they have organised records, then it is okay. But what if they don’t? They are already occupied with numerous issues. The last thing they need is another task that ultimately decides their business's profit or loss status (which is crucial). The processes get even more complicated when they handle various projects at any one time. Identifying which is capital and profit across dozens of transactions is a nightmare!

However, when the working capital is in gold, they know the exact amount pledged at Ar-Rahnu centres. The next step would be to get more gold items to increase their working capital allocation whenever they profit from the business. This helps the business owners keep track of just the grams of gold they own—no more unnecessary headaches with tedious financial records.

‘Safer’ than fixed deposit

There are business owners that require bank loans to expand their business. In such instances, having all business-related cash in the bank’s fixed deposit would be helpful. This would convince the bank officers that the business owners are financially sound. And in the worst-case scenario, the deposit is there to serve as collateral.

How about placing deposits to earn interest?

If the intention to keep the cash in a fixed deposit is to ‘earn’ the interest, it is recommended to save in gold instead. Fixed deposit interest rates are pretty low these days, and when taken inflation into account, the return is not sustainable. 

Another risk with regards to fixed deposits is the currency risk. If currency depreciation occurs (Ringgit depreciation in 1997 and 2015), the expected return will result in a loss rather than profit. The depreciation rate to Ringgit in 1997 and 2015 was 50% and 30%, respectively. Hence, keeping our working capital in gold is inflation-proof and is also currency depreciation proof.

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Hope you find it useful.

Your buddy on gold investing,

Naresh G