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Short-Term Assets vs. Long-Term Assets
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As a business owner, there are a number of important things you should be familiar with, and the type of assets your company has is one of them. Just about every business requires some forms of assets to operate their business, whether it’s a product that you supply to your clients or items that are needed to carry out business. Your company’s balance sheet will detail the assets on the books.
More specifically, are your assets short or long-term assets? How quickly do your business’s assets depreciate, if at all? Have these assets been paid in full upfront or have been financed as debt? And how can you use your business assets to secure financing in the future? In this article, we’ll discuss business assets in a little more detail.
What is a Short-Term Asset?
A short-term asset is essentially a current asset on the books. More specifically, they are assets that are used up by your company within a 12-month period and likely will not be around after that time frame expires. These types of assets can be easily converted to liquid cash within one fiscal year and are used to carry out daily operations, expenses, and investments. These types of assets can include the following:
Liquid cash in your bank account – Businesses typically use business checking accounts as their main banking source to hold business-related funds that are readily accessible. But savings accounts can be used as well to hold surplus cash. Any cash in these accounts to be used for operating activities, such as covering expenses, can be considered a short-term, or “current,” asset.
Accounts receivables – Any products that are purchased by customers on credit require accounts receivables to keep track of those who pay in this manner rather than in cash or on debit.
Inventory – Whatever products you currently have in stock to sell to customers are typically considered short-term assets because they will (hopefully) be sold in a relatively short amount of time and will therefore only be on your shelves temporarily.
Learn how to manage small business inventory.
What is a Long-Term Asset?
Unlike a short-term asset, a long-term asset is one that is typically fixed to your business. Your business will likely be using these assets for longer than 12 months in the production of goods and services that have a lifespan of more than a year. More specifically, your balance sheet will record these types of assets as property, plant, and equipment (PP&E) and can include any of the following:
Land – The land that your business’s headquarters sits on is a fixed asset.
Building – The structure that your business is being carried out in, along with the land it sits on, is also considered a long-term asset. It also includes any improvements that you may have made it the land or building as part of your business operations.
Vehicles – Any cars, trucks, machinery, or any other type of vehicle owned by your business is considered a fixed asset.
Furniture and fixtures – The furniture, lighting, flooring, appliances, or other fixtures in the building of your business are considered to be fixed assets.
Equipment – Any computers, laptops, telephones, photocopiers, cash registers, or other tools under the equipment category are considered long-term assets if they have been used for more than a year.
Patents – If your business currently has any patents outstanding that you are paying for, these can be considered long-term or fixed assets.
Learn how to control cash flow when you own a seasonal business.
Link Between Assets and Depreciation
Many assets depreciate in value within moments after they are purchased. Fixed assets typically experience some degree of depreciation and can’t be liquidated to cash very easily to meet operational expenses or investments. This accumulated depreciation takes into account your company’s cost for non-current (short-term) assets to expense them over their useful lives. You can then save money by spreading out the cost of purchasing these assets over many years.
Because of their short lifespan, current assets are not depreciated. Instead, only long-term assets can be depreciated, such as land, building, equipment, vehicles or fixtures that have depreciated over time.
How to Use Your Assets as Security For a Loan
In business, it takes money to make money. And oftentimes, a little financial assistance is needed to continue and expand business operations. In this case, a business loan may be needed, whether it’s to acquire a larger commercial space, hire more employees, buy more equipment, or pay for marketing campaigns, among other things.
If you’re in need of a loan for your business, you’ll need to qualify for one. Luckily, you may be able to use the value of your business’s assets to collateralize the loan that you apply for. The following assets may be used to secure a business loan:
Property – Physical property is perhaps the best type of asset that you can use as collateral for a loan. Whether it’s land, a warehouse, or a storefront owned by your business, these properties are typically very valuable and would make an ideal type of collateral for a loan.
Inventory – Your business’s inventory can also be used to secure a loan.
Equipment – You may collateralize a loan with equipment, such as machinery or vehicles.
Credit card transactions – If much of the payments made by your clients and vendors are made by credit card transactions, you may be able to use future transactions in exchange for funding. Known as a merchant cash advance this arrangement provides you with a loan, after which you pay back the lender every day via a small percentage of your daily credit card sales.
Your business’s assets play a crucial role in the profitability and sustainability of your business. They’re essentially at the core of your company. But they can also be used to secure financing whenever your business may need it.
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