Liquidity crisis

Liquidity crisis

A liquidity crisis occurs when a business experiences a lack of cash required to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due, causing it to default. When "liquidity crisis" is used to refer to an economy as a whole it means that liquidity crises affecting principal players in the economy are resulting in diminished availability of credit.

Some businesses choose to "trade through" a liquidity crisis in the hope of finding additional cash flow needed to survive the temporary crisis. This often involves delaying payment of creditors, issuing bonds, making additional loans, selling assets, and encouraging more prompt payment from customers. Continuing to trade through a liquidity crisis in circumstances where the underlying business is not viable (or where the market itself is experiencing a prolonged recession or credit crunch) will only delay the inevitable bankruptcy and result in further losses.

When a liquidity crisis occurs, it is vital that the stakeholders accurately and objectively assess whether the business is viable and ultimately can succeed with the injection of further cash to stave off insolvency, or whether it is incapable of surviving long term in the current market. The financier or bank lender is often the ultimate arbiter of whether a business survives a liquidity crisis or not.

The decision whether to "trade through" a liquidity crisis or declare bankruptcy is quite possibly the most difficult and complex decision any business leader can face.

ee also

* Insolvency
* Liquidity crisis of September 2008

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Liquidity Crisis — A negative financial situation characterized by a lack of cash flow. For a single business, a liquidity crisis occurs when the otherwise solvent business does not have the liquid assets (i.e., cash) necessary to meet its short term obligations,… …   Investment dictionary

  • liquidity crisis — noun a state in which there is a short supply of cash to lend to businesses and consumers and interest rates are high • Syn: ↑credit crunch, ↑squeeze • Hypernyms: ↑financial condition …   Useful english dictionary

  • Crisis situations and unrest in Europe since 2000 — List of crises situations and major protests in countries of Europe since year 2000. Contents 1 2011 2 2010 3 2009 4 2008 5 2007 …   Wikipedia

  • Liquidity risk — In finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).Types of Liquidity Risk#Asset Liquidity An asset cannot be sold due to lack of… …   Wikipedia

  • liquidity —    the ability to pay your debts as they fall due    Only euphemistic when you lack it:     Sir Jeremy came to me saying that he lacked liquidity... that s the delicate way these European aristocrats say in deep shit. (Deighton, 1993/2)    A… …   How not to say what you mean: A dictionary of euphemisms

  • liquidity — /lɪ kwɪdɪti/ noun cash, or the fact of having cash or assets which can be changed into cash ♦ liquidity crisis not having enough cash or other liquid assets …   Dictionary of banking and finance

  • Liquidity trap — A liquidity trap is a situation described in Keynesian economics in which injections of cash into an economy by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash… …   Wikipedia

  • crisis — noun ADJECTIVE ▪ acute, grave, major, serious, severe, terrible, worst ▪ the worst economic crisis for fifty years ▪ …   Collocations dictionary

  • liquidity — noun Liquidity is used before these nouns: ↑crisis, ↑trap …   Collocations dictionary

  • Market liquidity — Liquidity redirects here. For the accounting term, see Accounting liquidity. In business, economics or investment, market liquidity is an asset s ability to be sold without causing a significant movement in the price and with minimum loss of… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.