What does 'financial distress' refer to for a business?

Financial distress refers to a situation where a business is unable to meet its debt obligations or is on the brink of insolvency. This condition typically arises when a company experiences significant cash flow problems, which can limit its ability to pay back loans, make interest payments, or fulfill other financial commitments. As a result, the business may face severe operational difficulties, and creditors may take action to recover owed amounts.

Recognizing financial distress is crucial, as it can lead to serious consequences such as bankruptcy if not addressed. Companies in financial distress might pursue strategies like restructuring debts, seeking additional capital, or reducing expenses to stabilize their financial standing and regain solvency. Understanding this concept is key for managing a business's financial health and ensuring long-term viability.