Cash Is King. An army may march on its stomach, but for companies, it's liquidity that keeps the business going. For many companies, typical sources of liquidity, beyond cash flow from sales or other revenue, are (1) financing from banks or other secured lenders, (2) credit from vendors that can reduce immediate liquidity needs, and (3) when needed, loans from owners, investors, or other insiders.
When A Liquidity Crisis Hits. Companies in financial distress often find that their need for liquidity goes up just as the availability of traditional financing goes down. The borrowing base may shrink, the ability to get further advances may be cut off, and loans may go into default. Worse, new lenders may be unwilling to make loans given the distress. For many distressed businesses, revenues may also be declining and insufficient to cover expenses without additional financing. A liquidity crunch can quickly snowball into a liquidity crisis.