Growing does not always mean a startup is financially healthy. Many companies increase sales, acquire customers and expand their teams whilst, at the same time, reducing their liquidity, increasing their dependence on external funding, or weakening their ability to respond to challenges.

Most startups do not enter into crisis overnight. Typically, there are warning signs that, if analysed in time, allow risks to be identified and decisions to be made before the available alternatives become much more limited.

Identifying these early warning signs can make the difference between correcting a deviation in time or facing a far more complex financial situation in the future.

Can a Startup Grow and Have Financial Problems at the Same Time?

In the entrepreneurial ecosystem, growth is often perceived as a sign of traction and business model validation. However, it can coexist for a long time with a gradual deterioration in the company’s financial health.

Many startups do not enter into crisis overnight: they accumulate warning signs that, when viewed individually, may seem manageable, but together place the company in a vulnerable position. As long as growth metrics remain positive, these signs tend to be ignored, based on the assumption that the next funding round will arrive or that scale alone will solve existing imbalances.

But growth is not synonymous with sustainability.

Below, we analyse seven signs that may indicate a startup is entering a period of financial stress, even when its commercial indicators remain positive.

1. Growth Without Cash Generation

The first warning sign is growth that does not translate into real cash generation.

The company sells more, secures significant contracts or increases its customer base, yet it continues to depend on external funding to sustain its day-to-day operations, and there is no clear path to profitability or break-even.

Collection periods, customer acquisition costs or premature team expansion can cause growth to consume more resources than it generates.

In some cases, management cannot even clearly explain how that traction will eventually be converted into cash. When this happens, the risk ceases to be purely financial and becomes strategic.

2. Lack of Visibility and Internal Financial Control

Another common symptom appears when the management team lacks reliable and up-to-date financial information.

Financial reporting is delayed, cash flow forecasts are not reviewed regularly, and the founding team is aware of the company’s actual cash position only after weeks of delay.

This shortcoming is not merely administrative. When information arrives late, decisions arrive late as well.

Without financial visibility, it becomes much more difficult to anticipate problems, negotiate with investors, plan funding requirements or react to market changes.

3. Structural Dependence on Funding Rounds

Many startups fall into a dynamic in which the next funding round ceases to be a tool for accelerating growth and instead becomes an essential condition for survival.

There is a fundamental difference between financing growth and financing continuity.

In the first case, investment allows the company to capitalise on a business opportunity. In the second, it is used to cover a cash flow requirement that the business is still unable to sustain on its own.

When a company needs to raise capital on a recurring basis merely to maintain its operating structure, each funding round becomes a critical moment. If the market changes, negotiations drag on, or metrics fail to justify the expected valuation, the room for manoeuvre shrinks rapidly.

The startup then stops making decisions driven by ambition and begins making them out of necessity.

4. Deterioration of Unit Economics

In a scalable model, growth should progressively translate into greater efficiency.

However, a warning sign appears when the opposite occurs: each customer becomes more expensive to acquire, margins shrink, commercial costs increase, or the profitability of each transaction declines.

This deterioration may be reflected in various indicators:

⤷ Increase in Customer Acquisition Cost (CAC).

⤷ Reduction in margins.

⤷ Lower conversion rates.

⤷ Higher customer churn.

⤷ Greater competitive pressure on pricing.

What matters is not a snapshot at a specific moment, but the trend. If efficiency worsens as the company grows, the model may require adjustments before further scaling.

5. Delays in Payments and Treasury Management Pressure

There are more visible signs that usually appear when problems begin to deepen.

Delays in supplier payments, the recurring postponement of tax and payroll-related obligations, and the constant need to prioritise urgent payments are common examples.

A typical sign is when the company begins managing cash flow based on urgency. Payments are prioritised according to the pressure received, and increasingly short-term bridge financing solutions are sought. These measures buy time, but they rarely solve the problem unless accompanied by a review of the financial model.

Liquidity problems eventually become visible to third parties, which in turn causes reputational damage that is difficult to reverse.

6. Reactive Operational Adjustments

When these warning signs emerge, the organisation often reflects a shift from a growth-focused mindset to a defensive one. Hiring slows down, budgets are cut, and initiatives previously considered strategic are put on hold. At a certain point, these measures may be necessary, but they reveal that the company is no longer in an expansion phase, but in a containment phase.

The problem is not adjusting the growth structure or pivoting the business plan, but doing so too late and reactively. Improvised cost cuts or the abrupt suspension of projects convey a lack of planning, affect team motivation internally, and may be interpreted externally as a sign of weakness.

In many cases, these adjustments occur when the company has already exhausted a significant portion of its alternatives. That is why anticipation is essential: the more time available to adjust and restructure the business plan, the greater the decision-making capacity.

7. Loss of Confidence From the Ecosystem

Finally, there is a signal that goes beyond numbers and is often decisive: the loss of confidence from the surrounding ecosystem.

Greater investor intervention, increased difficulties in attracting talent, and increasingly complex financing processes are signs of a gradual and silent deterioration that, if consolidated, can lead to accelerated sale processes or the need to undertake formal restructurings.

Trust is an asset that is extremely difficult to recover.

Investors evaluate metrics, but they also assess the founding team’s ability to anticipate and solve problems. Employees seek stability and growth prospects. Suppliers and partners can tolerate occasional tensions, but not prolonged uncertainty.

Furthermore, the loss of confidence becomes a self-reinforcing vicious circle. When investors no longer support the business plan, alternatives become limited, particularly access to financing, which in turn worsens the company’s standing with commercial partners and employees.

The Risk Is Not the Signal, but Ignoring It

The main risk in a startup growth model is normalising these warning signs or justifying them with other growth metrics.

A company may appear to be moving forward while, in reality, its financial position is weakening and when that imbalance becomes obvious, the room for reaction is often much smaller than expected. The earlier the problem is identified, the more options will exist to correct it without destroying the company’s value.

Acting While There Is Still Room to Manoeuvre

Startups rarely move from a situation of normality to a crisis situation suddenly. More commonly, there are warning signs that reveal something is changing and provide an opportunity to act before the available alternatives are significantly reduced.

The earlier problems are identified, the greater the chances of correcting them, rethinking the financial strategy, strengthening the company’s position and preserving the value created.

In many cases, the difference between a temporary difficulty and a structural crisis lies not in the metrics, but in the speed with which decisions are made when those metrics begin to deteriorate.

Is Your Startup Detecting Any of These Warning Signs?

At AGM Abogados, we support startups, founders, and investors facing financial stress situations, helping them identify risks, assess alternatives and make decisions whilst there is still room to manoeuvre.

Discover how we help startups facing funding challenges, growth issues or financial difficulties through our service: Legal Advisory for Startups in Crisis

The appointment of Gonzalo Molina strengthens AGM Abogados’ Tax practice and supports the firm’s continued growth in Madrid. With more than 20 years of experience in tax advisory services, he joins the partnership team alongside Jordi Rovira and Leonardo Cárdenas.

AGM Abogados continues to strengthen its commitment to the growth of its Madrid office with the appointment of Gonzalo Molina as Partner in the Tax and Fiscal Law Department.

A Law graduate from the Autonomous University of Madrid, Gonzalo holds a Master’s Degree in Taxation and Tax Advisory and a Master’s Degree in Economic and Financial Management from the Centro de Estudios Financieros (CEF). He has more than 20 years of experience in tax advisory services. Throughout his career, he has worked predominantly at leading national and international law firms, advising multinational groups, tax groups and high-net-worth individuals on direct and indirect taxation, as well as on corporate restructuring and asset acquisition and disposal transactions.

Gonzalo Molina joins AGM Abogados from Ramón y Cajal Abogados and becomes part of the firm’s Tax and Fiscal partnership team, alongside Jordi Rovira and Leonardo Cárdenas.

With this appointment, AGM Abogados further strengthens a practice that provides ongoing tax advice to national and international companies on a wide range of tax matters.

More Than 20 Years of Experience in Tax Advisory Services

His experience also includes assisting and representing companies and private individuals in tax audits and inspections, as well as proceedings before the Economic-Administrative Courts and the Contentious-Administrative Courts.

Jordi Rovira, Partner in AGM Abogados’ Tax Department, commented: “Gonzalo’s arrival represents a significant boost to our tax practice and to the development of our Madrid office. His experience, technical expertise and strategic vision will bring considerable value to both our clients and the continued growth of the firm.”

For his part, Julio Rocafull, Managing Partner of the Madrid office, stated: “Gonzalo’s appointment is another step forward in our growth strategy for Madrid. His arrival strengthens a key practice area for the firm and enables us to further expand our capabilities in order to provide increasingly specialised advice to our clients."

Gonzalo Molina added: “I am delighted to join AGM Abogados and become part of a strong project with a clear growth strategy and a strong client-focused approach. I am convinced that together we will continue to deliver high-value tax advice and support our clients in making key business decisions.”

The appointment of Gonzalo Molina forms part of AGM Abogados’ commitment to strengthening its strategic practice areas and consolidating the growth of its Madrid office through the incorporation of highly specialised professionals with extensive experience, enabling the firm to continue providing outstanding service to its clients.

Many startups go through periods of financial strain during their growth. The key is not whether difficulties arise, but whether they represent a temporary setback or a sign of a deeper issue that could compromise the viability of the business.

There are certain financial indicators that make it possible to evaluate a startup’s economic health beyond revenue or growth. Analysing how they evolve can help identify risks early on and make decisions while there is still room to manoeuvre.

How to Know if a Startup’s Financial Problems Are Temporary or Structural?

When a startup experiences financial difficulties, there is rarely a single moment that marks the beginning of the problem.

Most commonly, warning signs appear gradually. Sales continue, customers keep coming in, and operations seem to run as usual. However, tension slowly begins to build: it becomes increasingly difficult to meet certain payments, external financing becomes more important, and room for manoeuvre shrinks.

In many cases, these shifts can be detected before they turn into a serious issue. To do so, there are specific indicators that allow you to assess the company’s financial strength beyond revenue or growth.

1. Liquidity: Can the Startup Meet Its Short-Term Obligations?

Liquidity measures a company’s ability to meet its most immediate commitments.

One of the most widely used indicators for assessing this aspect is the current ratio (liquidity ratio):

Formula: Current ratio = Current assets / Current liabilities

How to interpret it:

⋆ ≥ 1: The company has sufficient resources to meet its short-term obligations.

⋆ < 1: There may be difficulties in meeting certain payments without resorting to additional financing. 

However, this indicator should be analysed with caution. Not all current assets can be converted into cash with equal ease. A large volume of accounts receivable can create an impression of solvency that does not always reflect the actual cash available.

That is why, when recurring difficulties in meeting ordinary payments start to surface, it is best to look beyond the raw figure and analyse what is truly behind it.

2. Working Capital: Are Daily Operations Sustainable?

Working capital shows whether a company has sufficient resources to sustain its day-to-day operations.

Formula: Working capital = Current assets – Current liabilities

How to interpret it:

⋆ Positive: There is short-term financial balance.

⋆ Zero: The company lacks a buffer against unexpected events.

⋆ Negative: Part of the non-current assets is being financed with short-term debt. 

When working capital deteriorates consistently over time, the company usually loses its ability to absorb payment delays, cost increases, or deviations from forecasts.

In other words, it increasingly requires everything to go exactly as planned just to maintain financial balance.

3. Leverage: To What Extent Do You Rely on Third Parties?

External financing is part of the growth process for many startups. The problem arises when dependence on an external financing increases steadily.

One of the most used indicators to assess this situation is the debt-to-equity ratio:

Formula: Debt-to-equity ratio = Total debt / Shareholders’ equity

How to interpret it:

⋆ < 1: Moderate leverage level.

⋆ Between 1 and 2: Caution zone.

⋆ > 2: High dependence on external financing. 

Debt is not inherently negative. In fact, it can be a useful tool to drive growth. However, when it is used repeatedly to sustain ordinary operations or cover operational needs, it can become a factor that progressively limits the company’s options.

The Real Warning Sign Appears When Multiple Indicators Deteriorate

None of these indicators, on its own, proves that a startup is facing financial difficulties.

The real red flag appears when several of them begin to deteriorate at the same time. Tighter liquidity, shrinking working capital, and greater dependence on external financing may indicate that the company is entering a state of higher vulnerability, even if growth and commercial activity look positive.

Startups rarely fail because of a lack of data. More often, they fail because they do not act when the data is already signalling that circumstances have changed.

Detecting financial strain at an early stage is essential to preserve value and keep all options open. Taking timely action usually makes all the difference.

Act While There Is Still Room to Manoeuvre

Startups rarely go from business as usual to a crisis overnight. More often than not, there are early warning signs that something is changing: recurring liquidity issues, deteriorating working capital, increasing reliance on external financing, or a gradual reduction in the company’s ability to respond.

Identifying these indicators at an early stage allows founders and management teams to evaluate alternatives, rethink financing strategies and take action before the available options become significantly more limited.

In many cases, the difference between a temporary hiccup and a structural problem lies not only in the financial data, but in how quickly action is taken when that data begins to deteriorate.

Is Your Startup Detecting Warning Signs?

AGM Abogados helps founders, startups and investors assess situations of financial strain, evaluate strategic alternatives and make decisions while there is still time to act.

You can learn more about AGM Abogados' approach for startups facing financing, growth, or financial difficulty challenges in AGM Abogados' Legal Advice for Startups in Distress Service.