Non liquid asset guide for small businesses
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Businesses have different types of assets. From the real estate they own to the cash in the register, it is important to know what types of assets (and liabilities) your business is responsible for.
A critical distinction is the difference between liquid assets and non liquid assets. If you want to understand what is a non liquid asset, and why they’re important for your business, you’re in the right place.
What is a non liquid asset?
Non liquid assets (also known as illiquid assets or fixed assets) are a category of assets that aren’t easily converted into cash. Non-liquid assets typically must be sold and transferred in ownership to access their cash value, and finding an owner willing to pay market value can take weeks, months, or years. Common examples of non liquid assets include real estate, land, equipment, art, vehicles, collectibles, jewelry, precious metals, IRA accounts, and inventory.
Illiquid assets are typically purchased with capital expenditure and they depreciate over their lifetime, which is several years. Like liquid assets, illiquid assets are also put on the balance sheet for managing finances.
The difference between liquid and non liquid assets
Liquidity is a financial term that describes how quickly an asset can be converted into money. Cash, for example, is a pure liquid asset. The corporate headquarters building? Illiquid.
The more liquid the asset, the easier the liquidation process. Due to the intrinsic difficulties associated with selling illiquid assets, a fast sale often has a negative impact on the asset’s value.
Examples of assets considered liquid include money held in bank accounts , mutual funds, accounts receivable, money market funds, or U.S. Treasury bills, all of which can be sold quickly.
In general, non liquid assets have unpredictable cash equivalents in short time windows. Your company’s inventory, for instance, is a long-term asset that may only be of interest to certain parties, at certain times of the year. Even if you find a buyer, they may only be willing to buy those types of assets for dimes on the dollar.
So, if you needed to pay off a short-term liability (debt), selling off non liquid assets wouldn’t be an efficient way to produce the needed funds. Instead, these are long-term investment accounts that are intended to create ongoing value for the business. Generally speaking, there is a higher risk and it takes more effort to sell non liquid assets.
Liquid assets are the ideal source for paying off short-term cash crunches. For businesses that require significant illiquid assets, credit cards and lines of credit are areas where you can temporarily boost your overall liquidity profile in a bind. They allow you to spend money, even when you’re waiting for payments.
The problem with illiquidity
A company’s financial health is measured by its mixture of liquid and non liquid assets.
In uncertain times, it's safer to have more liquid assets than non liquid. When your capital is not tied up in fixed assets that are hard to convert and depreciate over time, you can respond more quickly to business shocks. In such a case, you’re better positioned to weather any financial storms or unexpected liabilities.
Having a significant investment in non liquid assets won’t be of any help should a disaster strike or an unexpected bill come due, since you can’t quickly access the cash value of the asset. For example, if an economic downturn were to occur, a highly illiquid company such as a manufacturer would likely have to sell off fixed assets in order to pay the bills or repay debts. Should that occur, you may be forced to sell off essential equipment or property (at a significant loss) that previously played an integral role in your day-to-day operations. As a result, this could significantly impact your long-term revenue as well.
On the other hand, if you had a healthy supply of liquid assets available, you could instead pay off creditors without having to sell critical parts of your business for less money than they were worth. Put simply, liquid assets act as a shock absorber in times of economic downturn
It’s worth noting that some businesses depend heavily on illiquid assets in order to operate. For instance, food and manufacturing tend to have high volumes of equipment, machinery, inputs, and product stockpiles. If you operate in this line of work, it’s important that you offset your illiquid position with cash on hand and credit lines.
The final consideration regarding non liquid assets is the impact they can have on loans and interest rates. This is a large advantage of holding excess cash that’s not often considered. However, the more current assets you have, the more likely you are to get a better loan term or a lower interest rate. Why? Because lenders know that you can adequately service your liabilities. Getting a better rate could save you a lot of money over time.
Ramp: Financial wellness made easier
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Illiquid assets is another term for non liquid assets, meaning things that are not easily converted to cash.
Stock, exchange-traded funds (ETFs), and similar investments are typically considered liquid assets. However, there are tax implications for selling stocks in certain periods of time. So, be sure to consult a tax professional or brokerage account before liquefying stocks.
Credit cards are not an asset at all, since you don’t own your available credit. Credit cards can be used to buy non liquid assets like equipment and real estate. However, one must be careful with developing credit card debt, which becomes a liability.
Since gold and other precious metals can be exchanged quickly and easily for cash, they can be considered liquid assets.
Similar to stock market holdings and precious metals, Bitcoin and other cryptocurrencies can be considered liquid assets, since they may be exchanged for cash relatively quickly and with little or no penalty.
A certificate of deposit’s (CD) liquidity depends on its terms and conditions. Generally, money in savings accounts, checking accounts, and money market accounts are liquid. However, a CD might go either way since it is usually illiquid for a fixed amount of time. Similar to an IRA or other retirement accounts, you can take cash out of a CD, with penalties and fees.