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What Is Liquid Capital?

Jim B.
Jim B.

Liquid capital is the total value of assets held by an individual or an organization which can be converted without hassle into cash or something of equal value. Capital is considered to be liquid if it can be exchanged at a moments notice and not lose any of its worth. In terms of an individual, liquid capital includes those assets which can immediately be sold and receive a fair value. Corporations and companies with plentiful liquid assets would be in good shape even in a worst-case scenario which requires them to pay all their debts.

The term "liquid" is often used in financial lingo because liquid flows freely, as opposed to solids which can be hard to move and static. It is often used in terms of the assets held by governments, corporations, or individual people. If assets are liquid, they can be easily transferred into cash, which is the most liquid asset of all, or at least acquire something close to equal value. As a result, those people with a great deal of liquid capital are often generally in a sound financial position even when problems arise.

Cash is a form of liquid capital.
Cash is a form of liquid capital.

Those people with great deals of cash that is easily accessible should it be needed can feel safe in knowing that they have significant liquid capital. Some assets, like real estate, could not easily be transferred to cash in an immediate fashion. On the contrary, illiquid capital would not be able to garner its true worth should it be exchanged, at least not until a significant amount of time has passed.

In the business world, liquid capital is a great indicator of financial strength for a company. As such, investors are often in search of those companies with plentiful liquid assets, since they are considered to be less risky than those companies whose capital is tied up and not easily accessed. Different industries have different standards for how much capital should be liquid. For example, the retail industry often necessitates relatively high illiquidity levels, since inventory forms a great portion of a store's assets and it cannot immediately be transferred to cash in an emergency.

There is a great deal of importance placed on liquid capital in the business world because of the amount of business that is conducted based on credit. Most businesses operate on varying levels of credit and debt with vendors and buyers. If a company should be put in a sudden position of having to pay all of its debts, it would need to have capital that is relatively liquid to satisfy those debt obligations.

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    • Cash is a form of liquid capital.
      By: Denis Gladkiy
      Cash is a form of liquid capital.