Understanding Insolvency & What It Means For Your Business

by | Jun 14, 2022

Are you struggling to pay your bills on time? Does your balance sheet have more liabilities than assets? Do your debts fill you with dread? If you answered yes to any of these questions, your business could be heading towards insolvency.

And you’re not alone…

Insolvencies are soaring to a 60 year high. In January 2022, government statistics gave the number of registered company insolvencies as 1,560. An average of 50 per day! More than double recorded in the same month the previous year.

What happened?

2 years of lockdowns have seen many businesses struggle. It’s said average losses are around £20,000 and Bank Of England figures showed a 25% increase in small to medium-sized enterprise (SME) debt.

Whilst the Federation of Small Businesses (FBS) is reporting some industry sectors are already on the up, it will not be a quick recovery for everyone.

If you’re worried about the future of your business and want to know more about insolvency and what you can do to survive the threat of it, read on…

A Quick Definition

Insolvency is when you can’t afford to repay your bills or debts as agreed and on time. When you have more money going out than in and your liabilities outweigh your assets.

It’s a cash-flow crisis and an extreme state of financial stress for the business and for you.

Why Does Insolvency Happen?

Loss of revenue, capital and credit cause business insolvency. The 3 most common contributing factors are…

1. Lack Of Cash-Flow Planning

When starting up a business, lots of people invest everything they have into its development to try and build it up quickly. Many forget to put some money away for a rainy day. It’s when there are no funds to access in an emergency that a cash-flow crisis can occur. Causes include unexpected bills, customers failing to pay or the effects of a pandemic.

2. Excessive Borrowing To Fund Growth

It can be very tempting to borrow money to fuel the growth of your business, especially if there’s future revenue in the pipeline. Unfortunately, things don’t always go to plan and so-called ‘guaranteed' income may not happen. Businesses then have to find other sources to repay debt such as more loans, asset sales or cutbacks. Eventually putting themselves in an insolvent position when cash flow slows down.

3. Loss Of Business To Competition

Your business can easily lose its market share to your competitors if it doesn't have a clear business strategy in place. Alongside this, people often underestimate the competition or ignore it altogether. Failure to recognise competition and react can quickly lead to loss of profits and a lack of cash. Often leaving a company vulnerable, at a loss, under financial stress and heading towards insolvency.

If anything so far is ringing true, it doesn't mean your business will become insolvent. There are things you can do now to prevent it. Keep on reading to find out what they are…

What Can Be Done To Prevent Insolvency?

It pays to be prepared. You’re probably reading this blog because you're worried about impending insolvency or have an inkling that’s the way things are heading. While every situation is unique, there are some key elements to look at that could help turn things around.

Make Time For Finances

As a business owner, you’ve got a lot on your plate. There are never enough hours in the day to get everything done and keeping track of your actual performance against your budget may have slipped down your list of priorities.

It’s now time to make time!

Don’t put it off any longer, no matter how tempting it might be to ignore your cash-flow crisis in the hope things will get better. The truth is, you need to take the bull by the horns and take action now for things to improve.

Improve Cash-Flow

This can seem like a struggle if things are already pretty grim, but there are some small, easy steps insolvency advisors may suggest that could improve things. These include:

  • Billing customers as soon as you can.
  • Reducing your payment terms.
  • Chasing overdue money you’re owed.
  • Reducing outgoings (e.g. wage costs).
  • Renegotiating payment dates with suppliers.

These are all things you can do to benefit your immediate and long-term cash flow.

Get Advice From The Experts

Even the most successful businesses struggle with things from time to time. What makes them bounce back is their ability to recognise they need help before it gets too bad and ask for it.

Seeking professional advice is a strength, not a weakness. It will help you feel supported in your decision making, offer you alternative solutions you may not have considered and can help save your business from becoming insolvent.

You can find advice online, in person or over the phone. There are options to suit every size and type of business. Insolvency experts want you to succeed, and it's their job to help provide you with the information you need to change, survive and thrive.

What To Do If Insolvency Happens To You?

Insolvency doesn’t ‌necessarily mean you have to shut down immediately. There are several different options that can enable a business heading towards insolvency to keep trading while things get sorted out.

These include:

  1. Contacting creditors to discuss your temporary cash flow issue and negotiate an informal agreement to change your payment terms without the threat of formal action.
  2. Applying for a Company Voluntary Agreement (CVA). This is a binding agreement between your business and creditors to repay debts over a set period at an affordable rate.
  3. Handing your business over to an insolvency practitioner to start the process of administration. This stops your business from facing immediate legal action from your creditors.

A final option is closing down your company completely through liquidation. This is when you stop conducting business and employing people. It also means your company is removed from the Companies House register.

Where To Find More Help…

If your business is struggling with cash flow, you're unable to repay your debts as agreed and your liabilities are greater than your assets it's time to do something about impending insolvency.

Facing the prospect of insolvency is overwhelming, confusing and frightening. But you don’t have to go it alone. Things can get better when you arm yourself with expert advice and support.

Take the first step today and find out what your legal options are when it comes to insolvency.

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