Financial distress

Financial distress is a term in corporate finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty.

If financial distress cannot be relieved, it can lead to bankruptcy.

Another source of indirect costs of financial distress are higher costs of capital as usually banks increase the interest rates if a state of financial distress occurs.

If operational issues are the reason for the distress, the company can negotiate a payment holiday with its creditors, while improving operational efficiency so as to be able to service its debt.

If the latter improvements are insufficient, the company may engage in the more extensive turnaround management.