What Are Liquid Assets

Simply put, liquid assets are those assets that can be sold or converted to cash with ease, either in an electronic form or solid cash. The use of the term ‘liquid’ to describe this type of assets is simply metaphorical. Sometimes, financial experts standardize the term to refer to any asset that can be converted to cash over a maximum time span of twenty days.

Product liquidity can be measured by the ease with which an item is bought and sold. Liquid market investments such as the ones at future markets and stock markets are more liquid compared to investments in the real estate market. Real estate may be considered a liquid asset when it is paid in full over a short period of time. If the property is sold on an installment basis, then it is considered illiquid.

In banking, deposits are not considered bank assets but assets of the account holders who deposit cash. In this case, account holders can easily withdraw their money. At the same time, the bank has assets in the form or reserves and loans granted to borrowers. A certain percentage of these assets are used as liquid assets to satisfy the deposit withdrawals made by the bank account holders and borrowers.

Examples of Liquid Assets

Bank notes and coins are obvious examples of liquid assets because they are easily recognized as legal tender for a variety of purchases or bills payments. They are also the most commonly used types of liquid assets nowadays. The production and regulation of these assets are controlled by the central bank of every country or the financial arm of the government.

The money in personal and business savings accounts and checking accounts is also considered liquid assets as they can be easily accessed by the account holder and used toward the payment of services and purchases as well as payroll. Access to these assets has become more convenient with the issuance of debit cards.

Some types of investments are classified as liquid assets as well. Mutual funds, insurance policies, bond funds, and stocks are considered liquid assets because they can be converted to cash in a short period of time. Other types of investments such as real estate are considered more illiquid because they take a longer period to sell in full. When considering the working definition of a liquid asset, tax refunds, some mortgages, and payment for incurred damages may be considered liquid assets. As long as the asset is sold for a sale value equal to its actual market value over a short period of time, it is considered a liquid asset.

Liquid Assets and Business

The right proportion of liquid assets in a business is essential for its financial success. In order for the business to keep running, it needs to have enough liquid assets to pay employees' costs, loans, supplies, and other important business expenses. A healthy balance of this type of asset is essential and serves as a tool for attracting investors or lenders. As long as the business is liquid enough, the lenders may be more willing to grant loans because the business proves that it is capable of keeping up with payments.