Financial distress

Financial distress is a term in corporate nance used

to indicate a condition when promises to creditors of a
company are broken or honored with diculty. If nan-
cial distress cannot be relieved, it can lead to bankruptcy.
Financial distress is usually associated with some costs to
the company; these are known as costs of nancial dis-
tress.
1 Cost of nancial distress
A common example of a cost of nancial distress are
bankruptcy costs. These direct costs include auditors
fees, legal fees, management fees and other payments.
Cost of nancial distress can occur even if bankruptcy
is avoided (indirect costs).
Financial distress in companies requires management at-
tention and might lead to reduced attention on the opera-
tions of the company.
Another source of indirect costs of nancial distress are
higher costs of capital as usually banks increase the inter-
est rates if a state of nancial distressed occurs.
2 Options for relieving nancial
distress
If high debt burden is the cause of nancial distress, the
company can undergo a debt restructuring. If operational
issues are the reason for the distress, the company can ne-
gotiate a payment holiday with its creditors and improve
operations to be again able to service its debt.a
3 External links
Indicators and Sources of Financial Distress
Predicting Financial Distress of Companies: Revisit-
ing the Z-Score and Zeta Models by Edward Altman
Financial Distress, Bankruptcy Law, and the Busi-
ness Cycle by Javier Suarez and Oren Sussman
The Costs of Financial Distress across Industries by
Arthur Korteweg
Insolvency Service website
Probability of bankruptcy screener for public com-
panies based on Altman Z Score
1
2 4 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES
4 Text and image sources, contributors, and licenses
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