What is Distress Cost?

Distress cost refers to the expense that an organization in financial distress faces beyond the cost of doing business, such as a higher cost of capital. If additional capital is not acquired, distress costs may extend to the need to sell assets quickly and at a loss to cover immediate needs. Companies in distress tend to have more difficulty meeting their financial obligations, which translates to a higher probability of breaching covenants or even defaulting.