A “liquidity gap” is basically the difference between our liquid assets (i.e. cash or things that can quickly be converted to cash) and our liabilities.
For example, if a person owes $120,000 in student loans but has $600,000 in the bank, their liquidity gap is positive: they owe a lot less than they have. (Which kind of makes us wonder why they haven’t just paid off the loan already, but that’s none of our business.) On the flip side, if we owe $120,000 and don’t have any liquid assets, our liquidity gap is negative: we owe more than we’ve got on hand to pay it off.
It’s not just individuals who should mind the liquidity gap, though. For example, if banks don’t have enough cash on hand to fund their customers’ requests, whether we’re talking loans or ATM withdrawals, they have a liquidity gap. And if an organization takes out a loan to, say, fund the development of a new product line, and then that product ends up being super lame and they can’t sell it, they might find themselves in a negative liquidity gap.
Speaking of banks and loans, though, if we apply for a loan and have a significant negative liquidity gap that doesn’t show any signs of shrinking soon, we might end up paying a higher interest rate on what we borrow, since the bank might be a little skeptical that we’ll be able to pay them back.
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Finance: What is liquidity preference?27 Views
finance a la shmoop. what is liquidity preference?
yeah well liquidity is a good thing you want it. being liquid means that you have
cash which gives you options to you know buy stuff. and yeah even the Amazon River [money leaves a wallet in the grocery store]
shops at Amazon. all right so if your flavor of
investment has a liquidity preference over someone else's then your investment
all else being equal is preferable. see the liquidity preference . specifically if
you have liquidity preference and usually this is found in the form of
early stage of venture capital investor term sheets for investing in companies
in the form of convertible preferred stock- like it converts into common at
the IPO or something like that- then you get paid before everyone else
gets paid -at least in this form of stock- if the company gets sold.
all right well technically that is, but the company is sold and your convertible
preferred hasn't converted into common shares yet this company didn't go public. [convertible stock made into common stock]
but so like let's think about the example where if the company raised
twelve million bucks in preferred stock, which all had a liquidity preference
over and above common ,and then the whole company was sold for just fifteen
million dollars. well then those with liquidity preference would get liquid
first .ie they get their twelve million bucks. then the remaining three million
would be sprinkled around everyone else who was do the dough. plus any dividends
or accrued assets that have come our way otherwise. and yes technically debt
holders get paid ahead of the various series preferred investors who then get [list of who gets paid first]
paid ahead of the common shareholder but that's a different video. all right so
when it comes down to it you want to have liquidity preference. clearly I
prefer to be liquid myself. [man floats in lake in an inner tube]
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