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What are liquid assets and non-liquid assets?

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A business or person can own many valuable assets. But as the expression goes, cash is still king. A company may generate billions of dollars in revenue, but if it can't generate liquid cash, it will struggle. An individual might own multiple properties or prized artwork, but in a financial emergency, they’ll depend on liquid assets to stay afloat.

Anything of financial value to a business or individual is considered an asset. Liquid assets, however, are the assets that can be easily, securely, and quickly exchanged for legal tender. Your inventory, accounts receivable, and stocks are examples of liquid assets—things you can quickly convert to hard cash

Liquidity, or your business’s ability to quickly convert assets into cash, is vital on multiple fronts. These resources help you weather financial challenges, secure credit, and settle liabilities with short notice. It's important for businesses to have a combination of liquid and non-liquid assets.

What are liquid assets?

A liquid asset is a type of asset that can be rapidly converted into cash while keeping its market value. There are other factors that make assets more or less liquid, including:

  • How established the market is
  • How easily ownership is transferred
  • How long it takes for the assets to be sold (liquidated)

Cash on hand is the most liquid type of asset, followed by funds you can withdraw from your bank accounts. No conversion is necessary—if your business needs a cash infusion, you can access your funds right away. 

There are many sources of accessible, flexible capital. So, what are liquid assets that entrepreneurs leverage in addition to cash? And what are the limitations?

Non-cash liquid assets 

Investments are next on the liquidity ladder. Some investment accounts are called cash equivalents because they can be liquidated in a fairly short time span (generally 90 days or fewer). As a general rule, long-term holdings are less liquid than short-term holdings.

Stocks are a classic example of liquid assets. The stock market is established with a steady number of buyers and sellers. How easy a cash conversion is will vary by security type, but you can typically sell your shares and use the funds within a few days. Stocks are considered slightly less liquid than cash for another reason: If the market is down, you could be forced to sell below value. 

Other great examples of liquid investments include U.S. Treasury bills (T-bills), bonds, mutual funds, and money market funds, which are a type of mutual fund. The Brex Cash account stores deposits in a very liquid, low-risk government money market fund. This ensures funds are available exactly when you need them. 

In terms of liquidity, some assets aren’t as attractive. They might have penalties for withdrawing funds early, or set balance requirements. For instance, you agree to a term length when you open a certificate of deposit (CD), a type of federally insured savings account. If you remove funds early, you’re penalized.

Many people are familiar with the steep early withdrawal penalties for retirement accounts like 401(k)s and individual retirement accounts (IRAs). As of 2019, you can cash out both accounts after age 59 and a half without tax penalties—any earlier, and you face a 10% withdrawal penalty. 

Recording assets with a balance sheet

You may be wondering how you—or your accountant—should be tracking all of your assets. The answer is one of three age-old financial statements prepared by businesses: a balance sheet. 

Companies use balance sheets to record assets, liabilities, and shareholders’ equity, and to understand financial position at a specific point in time. Assets are listed in this report according to how liquid they are. You’ll know based on a quick glance at a balance sheet whether you can pay off debt obligations when they come due. 

Using a cash management account like Brex Cash, you can quickly create a custom balance sheet with the data already recorded in your account.

Examples of liquid assets

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At this point, you understand the factors that make an asset liquid, as well as how to keep track of your holdings. Now, we’ll dig deeper: What are liquid assets in the business world? 

Consider adding these assets to your portfolio, if they apply.

  • Cash or currency: The cash you physically have on hand.
  • Bank accounts: The money in your checking account or savings account.
  • Accounts receivable: The money owed to your business by your customers.
  • Mutual funds: A fund that pools money from many different investors into a diverse portfolio.
  • Money market accounts: A type of low-risk, interest-bearing savings account.
  • Stocks: The shares you own.
  • Treasury bills, notes, and bonds: A safe and reliable investment option with a variety of maturity dates, or the date when the investor will receive their principal back.
  • Certificates of deposit: A savings account with a fixed withdrawal date.
  • Prepaid expenses: The insurance, rent, and other bills you’ve paid ahead of schedule.
  • Retirement investment accounts: 401(k)s, IRAs, and other accounts.

A healthy financial profile begins with a mix of liquid assets and non-liquid assets, which we’ll cover next. 

What are non-liquid assets?

Non-liquid assets, also called illiquid assets, can’t be quickly converted to cash. Most non-liquid assets must be sold to tap into their value, requiring you to transfer ownership. It can take months or years to find the right buyer for non-liquid assets, and selling them quickly tends to have a negative effect on value.

The most common examples of non-liquid assets are equipment, real estate, vehicles, art, and collectibles. Ownership in non-publicly traded businesses could also be considered non-liquid. With these kinds of assets, the time to cash conversion is difficult to predict. In addition, they require greater effort to liquidate. 

Take real estate investments, for instance. Unlike the other investments we’ve mentioned, real estate investments are considered non-liquid. 

Accepting the earliest offer on a property can result in a serious loss and lead to further financial strain. Contract negotiations could take several months, and may require multiple back-and-forths to reach a sum that matches the property’s real value. But if debt is growing and bills are racking up, business owners simply can’t afford to wait—a clear sign that this is an illiquid asset. 

Examples of non-liquid assets

Non-liquid assets are familiar to business owners and consumers alike. To get a business up and running, you’ll rent, lease, or purchase non-liquid assets by necessity. Some examples of non-liquid assets include:

  • Land and real estate investments
  • Equipment
  • Art
  • Vehicles
  • Jewelry
  • Collectibles

Inventory is often considered a non-liquid asset. If you think it will be sold at a profit in one year or less, it’s liquid.

How personal guarantees could put your assets at risk

In order to open a business card or corporate card, many financial institutions require individuals to agree to something called a personal guarantee. 

A personal guarantee is a commitment to transfer ownership of one’s personal assets (such as a house or car) to cover a debt (such as an unpaid credit card balance). In other words, personal guarantees grant banks the right to seize an individual’s assets to pay off business debts.

Fortunately, you don’t have to put your personal assets in jeopardy to build credit and win financing for your business. Brex’s corporate card is tailored to the needs of startups and requires no personal guarantee. We base approval on the factors that matter, like cash on hand and monthly sales.

Why asset liquidity matters

You should be able to recognize liquid assets with confidence, and have some idea as to which assets could be a worthwhile investment. Asset liquidity matters a great deal in business. It’s a major indicator of how prepared you are for economic changes and emergencies, and whether you’re putting your cash to good use. 

Liquid assets have one job: to be there when you need cash, especially for emergencies. Most financial advisors recommend having an emergency fund that covers expenses for six months. This fund will cover bills, repairs, medical insurance costs, theft, employee turnover, and other expenses.

Business challenges and emergencies don’t just occur on a personal or industry-specific scale. Some shifts turn the markets upside down.

The 2008 financial crisis, the worst U.S. economic disaster since the Great Depression, sent the global stock market spiraling. A sweeping crisis isn’t as likely as losing a client or dealing with an unexpected bill, but hard cash is almost always a safe bet.

If you have a higher number of liquid assets, you’re also more likely to get better loan terms and interest rates—a must-have for startups. Non-liquid assets offer long-term gains that shouldn't be discounted either.

What are liquid assets? The bottom line

Business owners are constantly trying to strike a balance between having financial security and avoiding too much idle cash. If you're trying to determine how to start building up liquid assets, you can't go wrong with creating an emergency fund for your business. From there, you can work with a financial advisor to determine whether you have the ideal combination of liquid and non-liquid assets backing your business ventures.

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©2020 Brex Inc. “Brex” and the Brex logo are registered trademarks.The Brex Mastercard® Corporate Credit Card is issued by Emigrant Bank, Member FDIC. Terms and conditions apply. See the Brex Platform Agreement for details.Brex Inc. provides a corporate card. Brex Treasury LLC is an affiliated SEC-registered broker-dealer and member of FINRA and SIPC that provides Brex Cash, a program that allows customers to sweep uninvested cash balances into certain money market mutual funds. Investing in securities products involves risk, including possible loss of principal. Neither Brex Inc. nor any of its affiliates is a bank. Please see brex.com/cash for important legal disclosures.