Will Companies See Liquidity Problems?

One of the most important aspects of corporate finance is the idea of liquidity . Liquidity represents the availability of cash assets. It can also represent the ease with which capital flows through a company. And one of the basic facts of liquidity in the business world is that credit is needed to keep things running smoothly . Credit helps even out cash flow so that businesses can cover their expenses, even as they await payment from customers and other inflows.

For non-financial companies, credit rollovers are vital in maintaining long-term liquidity. Businesses can freeze up and fail without a certain level of liquidity. And that is where some of the recent problems in the credit market come in. And it is possible that these problems will not be solved in the immediate future. The Traders Journal offers this insight into a future issue for corporate finance :

In its Spring survey of liquidity conditions of 1,300 non-financial, non-utility companies in the Americas, Moody’s said the majority of rated issuers (91%) benefit from committed revolving credit facilities as a reliable source of external funding . “Over the next 12 months, approximately 13% of these issuers face either partial or total maturities of their revolving credit facilities. While revolving credit facilities were easily extended when financial market conditions were robust, bank capital and lending appetites are more constrained and lenders may seek to amend facility size or terms upon renewal, weakening the liquidity profiles of some issuers .”

So, even though the Dow is rallying and there is optimism on the stock market , things are far from settled in the business world. However, higher profits for some companies will ease cash flow issues. But credit still has to be available, and at reasonable prices.

Image source: Mark Schellhase via Wikimedia Commons