What is a Nonfinancial Asset
A nonfinancial asset is an item that has its value determined by physical and tangible characteristics. Examples include real estate, equipment, machinery, or a vehicle. The classification of possessions as nonfinancial assets is important to businesses as these items will appear on the company's balance sheet.
In contrast, a financial asset has value based on a contractual claim, rather than a physical net worth. Financial assets include stocks, bonds, and bank deposits. Financial assets are generally easier to sell than nonfinancial assets because these assets trade on exchanges each business day.
Also, the value of a financial asset can be based on the value of an underlying nonfinancial asset. For example, the value of a futures contract is based on the value of the commodities controlled by that contract. Commodities are tangible objects with inherent value, while futures contracts, which do not have inherent physical value and are an example of a financial asset.
Nonfinancial vs. Financial Assets
Financial and nonfinancial assets differ based on how the assets are bought and sold. Many financial assets, such as stocks and bonds, will trade on exchanges and can be bought and sold on any business day that the exchange is open. It is easy to get the current market price to buy or sell these assets. As long as the market is liquid, there will be a buyer for every seller and vice versa.
On the other hand, a nonfinancial asset, such as a piece of equipment or a vehicle, can be challenging to sell because there is not an active market of buyers and sellers. The pricing of the nonfinancial item may be foggy as there is no market standard. Instead, many nonfinancial assets are sold when the seller finds a potential buyer and negotiates a sale price.
Securing Debts WIth Assets
Both financial and nonfinancial assets may be used as collateral to back a secured debt, standing in contrast to an unsecured debt, which is backed by the borrower's ability to pay. 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 an exchange, like a stock or bond, is easier to sell than a nonfinancial 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 nonfinancial asset is less attractive as collateral.