Lawyers for Greensill Capital have appeared in court to appoint administrators.
Liberty owns 12 steel plants in the UK including in Rotherham, Stocksbridge, Newport and Hartlepool.
The lender has "fallen into severe financial distress," according to its lawyers and had no way of repaying a £101m loan to Credit Suisse, the Financial Times reported.
Greensill lends money to businesses so they can pay their suppliers. One of its major customers is Sanjeev Gupta s GFG Alliance, which owns Liberty Steel.
The lender is expected to be in part bought in a pre-pack deal by Apollo Global Management, with news due within the next couple of days.
However the Apollo deal will not include Greensill's exposure to GFG Alliance.
Mr Gupta's business empire employs around 5,000 people in the UK, a majority of whom work for Liberty Steel.
Often labelled the "saviour of steel", the businessman has snapped up a series of production sites across the UK which had been under pressure from cheap overseas competition.
However GFG has itself faced pressure, and has relied on Greensill for around five billion dollars (£3.6 billion) worth of funding used to pay its suppliers.
"This is a deeply concerning situation, and a very worrying time for Liberty Steel workers," said Labour shadow minister for business and consumer Lucy Powell.
She added: "It's vital that the Government acts with the urgency required and doesn't wash their hands of the situation.
"As we've argued through the pandemic, the Government should do more to support British steel and the UK manufacturers who are their customers.
"Instead they have been ignored, without even one reference in the Budget, threatening jobs and weakening the foundations of our economy."
A spokesperson for trade union Community said: "Sanjeev Gupta needs to tell us exactly what the administration means for Liberty's UK businesses and how he plans to protect jobs.
"The future of Liberty's strategic steel assets must be secured and we are ready to work with all stakeholders to find a solution."
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