Most people are familiar with assets and liabilities as a financial concept. Specifically where assets are concerned, there are both hard and soft assets. Do you know the difference? A typical consumer whose biggest major debt is a residential mortgage probably doesn’t need to know. But business owners and investors certainly need to understand the difference.
A case in point is an investor looking to obtain a hard money loan to purchase a piece of property. Hard money takes its name from the requirement to offer a hard asset as collateral. A borrower who doesn’t know the difference between hard and soft assets may struggle to obtain loan approval.
The Hard Asset Defined
Actium Partners, a Utah hard money firm based in Salt Lake City, describes hard assets as tangible assets with fundamental value. Let us break down the definition based on its two components:
- Tangible – Generally, a tangible asset is a physical asset. Gold coins are tangible in the sense that you can hold them in your hand. They are physical in every sense of the term. That being said, services with fundamental value are sometimes recognized as tangible assets in a business setting.
- Fundamental Value – Fundamental value is inherent value that exists independent of external factors. Real estate has fundamental value for the simple fact that there will always be a demand for it. People will always be willing to pay for it.
Real estate is perhaps the most common hard asset in the world. It is also the most easily recognized. Other types of hard assets include business equipment, vehicles, manufactured goods, and even commodities.
Companies typically invest in hard assets for two reasons. First, the assets are necessary to provide whatever products or services the company offers. Second, acquiring hard assets can improve a company’s overall value.
The Soft Asset Defined
As for soft assets, they are often referred to as intangible assets due to the fact that they are not physical in nature. Soft assets do not always have inherent value, either. Their value is dependent on external factors.
A prime example of a soft asset is security. Think stocks, bonds, etc. here. Let us say you buy 1,000 shares of stock from your favorite company. The stock has no inherent value all by itself. Its value changes daily, based on the number of people buying and selling stock at any given time.
Furthermore, what happens if the company crashes and burns? Without cash to back up the shares, company stock becomes worthless. It is worthless because it has no inherent value by itself. On the other hand, the land on which the company’s facilities are built does have value. It can be sold even if the company goes out of business.
An Obvious Advantage
Hopefully, the definitions of hard and soft assets have made it clear that the former possess a clear advantage. Hard assets are superior because their inherent value is independent. Value may go up or down based on certain circumstances, but a hard asset always has value in and of itself.
This advantage is borne out in multiple ways. For instance, hard money lenders are willing to lend when applicants offer hard assets as collateral. Investing in hard assets is less risky because potential losses are lower.
Both hard and soft assets are part of a modern economy. Perhaps knowing the difference isn’t important to you. That’s fine. But if there ever comes a time when you do need to know how to tell a hard asset from a soft one, at least you are now equipped to do so.