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Illiquidity
Also called illiquid, liquidity risk.
Owning value you cannot turn into cash quickly enough or at a price close to what it is worth — the condition that kills profitable businesses.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Insolvency is owing more than you own. Illiquidity is owning plenty and not being able to pay Friday's payroll. They are different failures, and the second is far more common in small business.
A contractor with $600,000 of completed work billed on 60-day terms, $200,000 of equipment and a full order book can be entirely unable to buy materials for the next job. Nothing is wrong with the business. The money is simply in a form that will not move.
Why funders care
Underwriters look for the gap between the balance sheet and the bank account, because that gap is what the funding is meant to bridge and also what determines whether the business can service it. Assets are discounted according to how fast they convert:
- Cash and cleared deposits — immediate
- Investment-grade receivables — days, with a factor or an ABL line
- Inventory of standard goods — weeks, at a discount
- Specialised equipment — months, at a steep discount
- Real property, goodwill, an ownership stake — quarters, and only with a willing buyer
The structural cure and the expensive one
Illiquidity caused by a working capital cycle — you pay suppliers before customers pay you — is a structural problem with structural answers: factoring, a revolving line, deposits from customers, longer supplier terms. Short-term high-cost funding treats the symptom on a timetable shorter than the cycle causing it, which is why one advance often becomes two.
Where this one catches people
Owners treat net worth as capacity to pay. A funder does not. Equity in a building does not appear in a bank statement, and a daily remittance is collected in cash on a day when the cash may not exist. This is also why a business can be declined despite a strong balance sheet and approved despite a weak one — short-term underwriting reads liquidity and behaviour, not accumulated value.
Where you will meet this term
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Illiquidity — common questions
What does illiquidity mean?
Owning value you cannot turn into cash quickly enough or at a price close to what it is worth — the condition that kills profitable businesses.
Where does illiquidity catch people out?
Owners treat net worth as capacity to pay. A funder does not. Equity in a building does not appear in a bank statement, and a daily remittance is collected in cash on a day when the cash may not exist. This is also why a business can be declined despite a strong balance sheet and approved despite a weak one — short-term underwriting reads liquidity and behaviour, not accumulated value.
Is illiquidity the same as an interest rate?
Illiquidity is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does illiquidity apply to?
Working Capital, Business Line of Credit, Invoice Financing, Asset-Based Lending.
Is there a worked example of illiquidity?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside illiquidity?
Cash Conversion Cycle, Gross monthly deposits, Insolvency, Liquidation value, Liquidity.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.