What is a potential consequence of low liquidity in a firm?

Low liquidity in a firm refers to the difficulty in converting assets to cash or accessing cash quickly to meet immediate financial needs. One of the most significant potential consequences of low liquidity is the challenge a firm may face in meeting short-term obligations. This could include paying suppliers, covering payroll, or managing other operational costs on time. If a company does not have enough liquid assets—such as cash or easily sellable securities—it may struggle to make these payments, which can disrupt operations and damage relationships with stakeholders.

When liquidity is low, firms may also be forced to take on more expensive forms of financing, such as high-interest loans or emergency credit lines, which can lead to increased financial strain and higher costs overall. Furthermore, ongoing difficulties in meeting short-term obligations may lead to a loss of confidence from investors and creditors, further exacerbating the liquidity problem.

The other options, such as increased customer loyalty or enhanced credit ratings, are unlikely to be direct consequences of low liquidity. In fact, low liquidity often results in the opposite effect, where customer confidence can diminish and credit ratings may be lowered due to perceived risks. Hence, the choice highlighting the difficulty in meeting short-term obligations offers a clear and accurate reflection of the consequences that stem from low liquidity in a firm