What is a 'Nonfinancial Asset'
A non-financial asset is an asset with a physical value, such as real estate, equipment, machinery, or a vehicle. A financial asset, on the other hand, is an asset that has value based on a contractual claim, rather than a physical net worth, such as stocks, bonds and bank deposits. Financial assets are generally easier to sell than non-financial assets, because these assets trade on exchanges each business day.
BREAKING DOWN 'Nonfinancial Asset'
The value of a financial asset can be based on the value of a non-financial asset. For example, the value of a futures contract is based on the value of the commodities controlled by that contract. Commodities, which are tangible objects with inherent value, are an example of a non-financial asset, while futures contracts, which do not have inherent physical value, are an example of a financial asset.
How Assets Are Bought and Sold
Financial and non-financial assets differ, based on how the assets are bought and sold. Many financial assets, such as stocks and bonds, trade on exchanges and can be bought and sold on any business day, and the price to buy or sell these assets is easy to obtain. A non-financial asset, such as a piece of equipment or a vehicle, can be difficult to sell because there is not an active market of buyers and sellers that provides a price for the asset. Instead, many non-financial assets are sold when the seller finds a potential buyer and negotiates a sale price.
The Differences Between Secured and Unsecured Debt
An unsecured debt is secured by the borrower’s ability to pay, while a secured debt is backed by collateral, and that collateral may be a financial asset or a non-financial asset. One factor that makes a form of collateral more attractive to the lender is the ability to quickly sell the asset if the borrower fails to make principal or interest payments. A financial asset that trades on exchange like a stock or bond, is easier to sell than a non-financial asset, so a financial asset is more attractive to a lender.
Assume, for example, that XYZ manufacturing needs a $100,000 line of credit to operate the business, and the firm puts up $60,000 in investments securities and a $40,000 piece of equipment as collateral for the loan. If XYZ does not make principal and interest payments on the loan and defaults, the lender can sell the $60,000 in financial assets quickly to cover the loss. Finding a buyer for the equipment, however, may take longer, so the non-financial asset is less attractive as collateral.