A "liquidity crisis" occurs when a business experiences a lack of cash necessary to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due. Some businesses choose to "trade through" a liquidity crisis in the hope of finding extra cash flow needed to service 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 fundamental business is not feasible 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 very important that the stakeholders exactly and objectively assess whether the business is viable and finally they can succeed with the injection of further cash to stave off insolvency, or whether it is unable of surviving long term in the current market. The financier or bank lender is often the final 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.
When a liquidity crisis occurs, it is very important that the stakeholders exactly and objectively assess whether the business is viable and finally they can succeed with the injection of further cash to stave off insolvency, or whether it is unable of surviving long term in the current market. The financier or bank lender is often the final 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.
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