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While businesses can liquidate assets to free up cash even in the absence of financial hardship, asset liquidation in the business world is mostly done as part of a bankruptcy procedure.
When a company fails to repay its creditors due to financial hardship and prolonged losses in its operations, a bankruptcy court may order a compulsory liquidation of the business assets if the company is found to be insolvent.
They also stay away from products that are expensive to ship and to store.
A business has several options from which to choose when it liquidates its inventory.
Liquidate means to convert assets into cash or cash equivalents by selling them on the open market.
Liquidate is also a term used in bankruptcy procedures in which an entity chooses or is forced by a legal judgment or contract to turn assets into a "liquid" form (cash). In the investments arena, liquidation occurs when an investor decides to close out his or her position on a particular asset or security.
An investor that is long a stock may decide to sell some or all of the shares held in his portfolio for cash.
Liquidating an asset is carried out when an investor or portfolio manager needs the cash to re-allocate funds or re-balance the portfolio.