Emergency funding to overcome financial distress

Emergency funding to overcome financial distress

Posted on: 01 Sep, 2021

What is financial distress?

Financial distress is a common term in corporate finance used for insolvency. In such circumstances of financial distress, a company cannot generate sufficient income or revenue, and is unable to meet and pay its financial obligations.

This is generally due to disappointing business results and poor financial planning. Usually, the underlying factors are:

Insufficient sales proceeds.

Troubled projects and/or production.

High fixed costs.

A significant degree of illiquid assets.

Revenues are sensitive to economic downturns.

Ignoring the warning signs of financial distress before it gets out of hand can be devastating. Immediate and unconditional intervention is an absolute must. Depending on the cause, financial position and perspective, a restructuring can offer a solution. Often a painful procedure with limited options and many obstacles. Unfortunately, this is a result of believing 'it will be all right'. 

Compared to bankruptcy, financial distress is mostly a more gradual process, during which the company can continue to operate somewhat as usual, and payments on its obligations are pushed backwards. However, if the condition persists for an extended period and the financial crisis even deteriorates, the only option for the company may be liquidation through bankruptcy proceedings. 

Some companies choose to go into financial distress voluntarily, for example, because they have lost their competitive edge or are unable to adapt to changing market conditions. Other companies suffer from financial distress involuntarily when external events force them to close down or restructure their operations. Whatever the reason, when a company finds itself in financial distress, it will usually attempt to negotiate a restructuring with its financers and creditors.

There may come a time when severe financial distress can no longer be remedied because the company's obligations have grown too high and cannot be repaid. If this happens, bankruptcy may be the only option.

Failure to resolve financial issues can lead to bankruptcy. Financial difficulties often come with the costs for the business; these are known as costs of financial distress.

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