Liquidity Risk

See: Liquidity Squeeze.

Our company, Yacht Sea, Inc., makes and sells yachts. We love what we do, but economic recessions can really do a number on our profit margin. When financial times are tough, people tend to buy fewer yachts. (Crazy, we know.) In fact, the recent recession has landed us in a rather troubling situation: we don’t know if we’re going to be able to pay our short-term debts without causing the company to go under.

This is what’s known as “liquidity risk,” and the term can be applied to businesses, financial institutions, and individuals alike.

So what can we do about it? Well, if our lenders decide our liquidity risk is just too great, they might force us to sell off some assets to cover our debts. Or, if we know the recession is ending and we’ll be able to sell more yachts soon, we can try and negotiate with the lender and see if we can work out a short-term financing plan that will enable us to make payments toward our debt...and at the same time avoid liquidating the company’s assets.