Liquidity describes a company's ability to pay its short-term liabilities as they fall due. A business can be profitable on paper yet still face a liquidity crisis if cash is tied up in stock, unpaid invoices, or long-term assets. Cash flow, not profit, is what keeps a company trading day to day.
Key liquidity ratios
Two ratios are widely used to assess liquidity. The current ratio divides total current assets by total current liabilities. A ratio above 1.0 suggests the business has more short-term assets than short-term obligations. The quick ratio (or acid-test ratio) strips out stock — which may not be quickly converted to cash — giving a more conservative view. Lenders often examine both when assessing creditworthiness.
What causes a liquidity squeeze?
Common causes include rapid growth (where cash is consumed faster than it is collected), long customer payment terms, seasonal trading patterns, or an unexpected large expense. Even a profitable business can tip into a liquidity problem if its debtors are slow to pay while its creditors demand prompt settlement. This is sometimes called a working capital gap.
How short-term finance can help
A revolving credit facility such as Credicorp Flex is specifically designed to smooth liquidity fluctuations. A company can draw down when cash is tight, repay as receipts arrive, and draw again as needed — without taking on a fixed long-term liability. Credicorp Slice can also ease a specific bill payment by spreading the cost over three or four weekly instalments at a flat 6% fee, preserving day-to-day cash.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What is working capital and why does it matter?, What is overtrading and how can a business avoid it?.