What are Liquid Assets? Small Business Owner's Guide

6 min read

Executive Summary

We're entering a market where credit is getting squeezed, and small business loans are risky to rely on. Liquid assets are your defense against uncertainty.

Disclaimer: Our first priority is giving you the best financial advice for your business. Tillful may receive compensation from our partners, but that doesn’t affect our editors’ opinions or recommendations in the content on our website. Editorial note

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Life and business have a lot in common: They both have predictable ups and downs, as well as unforeseen circumstances that require us to scrap the schedule and change course.

Liquid assets are a defense against expected and unexpected circumstances. Looking at small business owners, liquid assets are particularly important, serving as padding for the company while you operate and grow.

What are liquid assets, exactly? Let’s clarify what liquid assets are, how they compare to non-liquid assets, and examples (plus how to get and protect liquidity as an entrepreneur).

Liquid assets vs. non-liquid assets

In general, there are two types of assets: Liquid and non-liquid.

Liquid assets are cash or anything you can easily convert to cash (like a money market account, for example).

Non-liquid assets (aka illiquid assets) are the opposite. They cannot be easily converted into cash at all or without losing market value. Non-liquid assets typically require selling and transferring ownership to access the cash they’re worth. A house would fall under this category.

Did you know? Asset liquidity is a spectrum. Some liquid assets are more or less liquid than others. The more liquid an asset is, the more it’s seen as low-risk (though many assets deemed “liquid” do carry a level of risk). More on the types of liquid assets and their level of liquidity below! 

Both liquid and illiquid asset types contribute to your total net worth. However, you can identify your liquid net worth to get a clearer idea of the capital you can quickly access.

Fun fact: “A high-net-worth individual is a person who owns liquid assets valued at $1 million or more. There is no official or legal definition of HNWI, and the threshold for high net worth is generally understood to include liquid assets only—money held in bank or brokerage accounts—excluding assets like a primary residence, collectibles or durable goods.” - Brian O'Connell, finance writer, former Wall Street Trader, and author of the books Creating Wealth and The Career Survival Guide.

Examples of liquid assets


Asset What is it? Level of liquidity
Cash or cash equivalents Digital or physical cash on hand (includes savings accounts, emergency funds, and checking accounts) Cash is the most liquid asset.
Money market accounts A way for investors to manage cash or short-term savings This type of marketable security is highly liquid and can easily be transferred to cash without the loss of value.
Treasury bonds and treasury bills (depending on maturity dates) Investments in federal debt through the U.S. treasury that incur interest yields If a bond or bill is nearing its maturity date or you’ve held it long enough to sell without loss of interest, the asset is relatively liquid. However, new bond and bill investments are not liquid.
Stocks, exchange-traded funds (ETFs), mutual funds, and certificates of deposit (CDs) Non-cash liquid investments from the private or public stock market in your brokerage or other investment accounts Less liquid than cash because you can cash out quickly, but potentially at an unfavorable time when the market is down

For comparison’s sake, some examples of non-liquid assets include real estate and vehicles (it can take a long time for you to receive the cash from a sale), collectibles (these typically increase in value over time), retirement accounts (individual retirement accounts, or IRAs, and other retirement savings solutions typically have early withdrawal penalties), and more.

Business vs. personal liquid assets

If you own a small-to-medium business (SMB), you know there’s a fine line between business finance and personal finance, even if the lines can seem blurred at times.

For example, you may have a personal vehicle, but write off some car-related expenses for business transportation. This is a non-liquid asset, but it helps paint a picture of how you can enter a gray area.

Taking a look at liquid assets, your personal cash or non-cash liquidity may be at risk in the event of a work-related lawsuit or debt collection if you fail to adequately protect yourself.

Protecting your liquid assets from creditors

Liabilities go after liquid assets when unprotected.

To protect your personal assets from business lenders and more, form a business entity. One common entity for small businesses is a limited liability company (LLC), which serves to limit your personal liability against business matters by putting all your business assets in a separate bucket. Keep business and personal finances separate and pay yourself paycheck to avoid muddying the waters.

When applying for a business credit card or loan, look for an option that requires “no personal guarantee.” A personal guarantee means you secure the agreement with personal or business assets (or both!). Doing this puts your assets at risk in the event of nonpayment. The Tillful card, for example, requires no personal guarantee.

Your financial plan should involve protecting your assets. Speak with a financial advisor or business attorney to make sure your financial security is top-notch.

High liquidity risk is a company killer

Maybe you’ve seen a company go bankrupt due to a lack of liquidity. As it turns out, this is the primary reason why businesses fail.

It stems from something called high liquidity risk or, as the Federal Reserve puts it, “the risk to an institution’s financial condition or safety and soundness arising from its inability (whether real or perceived) to meet its contractual obligations.” In other words, it’s the risk of your business being able to pay what it owes due to a lack of cash or non-cash liquid assets.

Take Modsy, for example. The interior design company shuttered in July 2022 while customers were still awaiting returns. Modsy founder and then-CEO Shanna Tellerman told TechCrunch at the time, “Capital constraints and uncertain market conditions forced the company to cease operations on July 6 and lay off all employees.”

To avoid this fate for your own business, know the potential outcomes of a lack of liquidity, early warning signs of high liquidity risk, and how to adequately manage liquidity risk.

What can happen if a company has high liquidity risk? A company can become insolvent, go bankrupt, and/or shutter entirely if the liquidity risk becomes too much to manage.

How can a company tell if it’s approaching high liquidity risk? According to business consulting firm Elliot Davis, “Liquidity pressures may spread from one source to another during a significant stress event.” If you feel liquidity pressure in one pocket of your business, don’t think it won’t spread. Many stress events are unexpected (we all went through the pandemic), so take liquidity risk management seriously.

What does liquidity risk management entail? Liquidity risk management serves two key purposes:

  1. Proactively assess the amount of money you’ll need to meet future obligations.
  2. Ensure cash or collateral availability to fulfill those needs (consider all forms of funds that will be available to the institution, under normal and stressed conditions).
  3. Consistently review expenses, manage budget, and diversify offerings for liquidity protection.

Last word on liquid assets for small businesses

Ready to meet your financial goals as a business owner? It’s time to take a long, hard look at your liquid assets. This will help you proactively protect your assets and, in turn, ensure your company’s longevity.

Even if you go through a stressful period of time with higher-than-normal liquidity risk, knowing what it looks like can help you turn it around.

Let your cash and non-cash liquid assets serve you and your SMB.

About the author

Rachel Curry

Written by Rachel Curry

Rachel Curry is a freelance finance and investing writer living in Pennsylvania. She wants to act as a bridge connecting the world to the information they need to feel better, be better, and make this planet a better place to live.

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