What are liquid assets and why are they important?
All businesses should know the difference between liquid and non-liquid assets — especially the quantity (and quality) of each that they have.
If you’re looking to learn more about liquid and non-liquid assets and what they mean for your business, keep reading.
What is liquidity?
“Liquidity” can be an obtuse term, but in terms of finances, it’s quite descriptive.
Liquidity is your business’s ability to convert your assets into cash. Or in other words, it’s how fluid, or easy, it is to access your business’s money. Turning your cash flow on and off like a tap is essentially synonymous with liquidity.
Your money is typically held in your assets as a business. And there are two types of assets to look at when determining your business’s liquidity: liquid vs non-liquid assets.
What are liquid assets?
A liquid asset is any type of asset that can quickly convert to cash while still keeping its market value. Liquid assets consist of both cash assets and non-cash assets. Most businesses have both.
Here are the factors that make assets more or less liquid:
How long it takes for the asset to sell
How established the market is for the asset
How easy it is to transfer ownership of the asset
Cash assets are any type of asset that involves actual currency. And cold, hard cash is one of the most liquid asset types available. This is because cash is available on-demand, it’s easily transferable, and holds well to market value.
Another highly liquid asset consists of funds you can withdraw from your bank account since they don’t require any conversion. Bank funds are quick, easy, and immediately available to access.
Your business’s account receivables are also a great liquid asset since the money is immediately yours. Customers or suppliers can designate money transfers to your business, which regularly goes straight into your account as long as they pay on time.
Non-cash liquid assets
Non-cash liquid assets are those that aren’t as easily turned into cash. But they’re considered cash equivalents since they’re able to quickly liquidate if you need access to the money. Investments and stocks are great examples of this!
The nature of each stock determines how easy it is to turn it into cash, but they’re usually available to access within a couple of days. However, you’ll sometimes have to sell your stock at a lower cost if the market is down, which means they won’t provide as great of a value.
Long-term investments are less liquid than stocks. For example, dipping into your 401(k) isn’t advisable for many reasons. Anyone under the age of 59 faces steep early withdrawal penalties when cashing out their 401(k).
What are non-liquid assets?
A non-liquid asset, also referred to as an illiquid asset, is anything that can’t easily (or quickly) convert to cash. These assets don’t have a cash flow at the turn of a tap.
Non-liquid assets are essentially long-term investments. Their purpose is to build long-term wealth for you or your business and prevent quick money access.
Non-liquid assets include things like:
Business equipment and vehicles
Collectibles such as art and jewelry
Nonpublicly traded business ownership
Accessing your non-liquid assets requires you to sell them or transfer ownership. And this isn’t always an easy process.
It can take anywhere from months to years to find the right buyer and then carry out subsequent contract negotiations. There’s often a substantial amount of back and forth when scouting a buyer and negotiating an acceptable value.
You’ll also have to wait out the settlement and transfer time after agreeing upon a sales price.
What are the benefits of liquid vs. non-liquid assets?
The benefit of liquid assets is that they’re readily available to access should your business need them. They also hold value well.
Non-liquid (long-term) assets are subject to volatile peaks and troughs, and aren’t nearly as easily accessible. There’s a waiting game that you should prepare to take on with long-term assets.
Why liquid assets are important
Liquid assets provide your business with money when it’s quickly needed. Rapid access to your funds helps you cover areas such as employee wages, supplier invoices, insurance payments, and any ongoing bills.
Liquid assets are also an invaluable safety buffer. The ability to access quick cash in the event of an unexpected bill is a relief for most businesses. Having a reserve of available assets serves as an emergency parachute, and can quite literally save your business in some cases.
You’ll remain better prepared for flexible operations the more you have in liquid assets.
Non-liquid assets certainly have their own benefits and are usually necessary for your business to build long-term wealth. But liquid assets are more critical to running an agile business.
Additionally, liquid assets are more helpful when applying for loans. Having liquid assets proves that you have more cash available, which qualifies you as a safer candidate to receive a loan. More liquid assets might even help you access competitive interest rates and better loan terms. This is crucial for startups and new businesses.
Access cash fast with Airwallex
Liquid assets are critical in helping businesses survive through unprecedented financial situations. But the key is balancing available cash reserves with strong financial security.
Airwallex is designed to help businesses access, send, receive, and transfer cash across the globe as quickly and effectively as possible. With same-day transfers and real-time payouts, you’re able to instantly release money to your business or suppliers, whenever you need it.
Airwallex also makes it easier to manage your accounting and payroll by reducing your margin for error. This helps in avoiding late payments for bills. Our platform will seamlessly integrate into your existing financial system and ensure your employee wages and supplier payments always go through on time. You also won’t face interest or late fees when using Airwallex.
We enable you to remain as liquid as possible by minimizing your transaction costs and keeping more money in your account — especially in the case of turbulent times.
Sign up with Airwallex today to get started!
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Evan Dunn manages the growth of Airwallex's SMB business in the US through marketing avenues. Evan is a generalist with expertise in SEO, paid media, content marketing, performance marketing and social selling. He also enjoys slam poetry and waffle making.