Financial Distress


DEFINITION of 'Financial Distress'

A condition where a company cannot meet or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns.

BREAKING DOWN 'Financial Distress'

A company under financial distress can incur costs related to the situation, such as more expensive financing, opportunity costs of projects and less productive employees. The firm's cost of borrowing additional capital will usually increase, making it more difficult and expensive to raise the much needed funds. In an effort to satisfy short-term obligations, management might pass on profitable longer-term projects. Employees of a distressed firm usually have lower morale and higher stress caused by the increased chance of bankruptcy, which would force them out of their jobs. Such workers can be less productive when under such a burden.

  1. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  2. Distress Price

    When a firm chooses to mark down the price of an item or service ...
  3. Supervisory Capital Assessment ...

    A financial stress test conducted by the Federal Reserve System ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  5. Illiquid

    The state of a security or other asset that cannot easily be ...
  6. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
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