Liquidity crisis for a business

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.

Money market

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

Finance companies, such as GMAC, typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets. Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the US Treasury issues Treasury bills to fund the US public debt.

• Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers.
• Retail and institutional money market funds
• Banks
• Central banks
• Cash management programs
• Arbitrage ABCP conduits, which seek to buy higher yielding paper, while themselves selling cheaper paper.
• Merchant Banks

Balance of trade

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports.^[1] A favourable balance of trade is known as a trade surplus and consists of exporting more than is imported; an unfavourable balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.