Recognising the warning signs of company insolvency
As a business owner, it’s your responsibility to track the financial health of your business as this will shape how you run your business, set budgets, spend money, and set long-term targets. If your company is cash deficient, the problems can quickly snowball which could lead company operations to grind to a halt and consequently leave behind a trail of debtors and unsatisfied stakeholders.
If a company becomes insolvent, in addition to the risks posed to customers and creditors, you are also at risk as the company director. If you continue to operate an insolvent company, the consequences are dear as you could be disqualified as a director or be held personally liable for company debts, so it’s vital to act fast.
Karl Hodson, a funding specialist at UK Business Finance, explains what company insolvency means, the warning signs to watch out for and why it’s instrumental to act early.
What is company insolvency?
A company is classed as insolvent if it’s unable to fulfil its debt obligations, or if it owes more than it is due. A company in a negative cash position can rapidly decline which may result in missed repayments, creditor pressure or failed loan applications. A company that is out of cash is deemed insolvent, and therefore, must take early action to minimise losses for customers.
If your business has rescue potential, you may be able to avoid a complete shutdown if an early remedy is sought, such as a credit control overhaul, application for new borrowing or a budget analysis with insolvency in view.
What are the warning signs of company insolvency?
One of the first signs of company insolvency involves disruption to company operations due to a shortfall of cash. Some other warning signs of company insolvency include:
- Overdue payment
- Borrowing more than you are owed
- Insufficient cash to maintain company operations, such as bills, staff wages and rent
- Creditor pressure, including threats of debt collection, repossession or court action
- HMRC action, including final notices and enforcement action
If you miss a warning sign or insolvency marker, your chance of recovery could expire, so act early to seek a remedy for your ailing business through a licensed insolvency practitioner.
Why is early intervention from an insolvency practitioner essential?
Early intervention from an insolvency practitioner is essential as they can diagnose the problem and propose a range of solutions that are most likely to revive your business. If you continue to trade while knowingly insolvent and ignore the deterioration of your business, you could be found guilty of wrongful trading. As a company director, it’s important to remember that your business could make a complete recovery if professional advice is sought out early, and the business is granted breathing space while it stabilises operations, reorganises debts, and revives company finances.
Can a company survive insolvency?
Your business may be able to survive insolvency with the right advice and suitable application of a rescue method, such as:
Time to Pay Arrangement – A Time to Pay Arrangement is an agreement made with HMRC to restructure overdue tax through affordable monthly instalments. This relieves the business of pressure to settle outstanding tax payments upfront, such as VAT, PAYE, and Corporation Tax.
Formal arrangement with creditors – A Company Voluntary Arrangement (CVA) allows you to enter a formal repayment plan with creditors to restructure payments. As a CVA is a legally binding arrangement, it provides the business with peace of mind and spares up cash to aid the recovery of the business.
Additional finance – A range of finance options are available to boost the business of cash or alleviate financial pressure, such as:
- Business loans – You may decide to take out a loan to settle HMRC debts, rather than pay the cost upfront to reduce pressure on company cash flow and make cash available for other payments.
- Refinance – The refinance route may help provide a much-needed cash injection to settle company debts and revive company operations.
- Invoice finance – Release cash tied up in invoices. Invoice finance helps make cash from invoices available faster. A long wait for payments can often have a knock-on effect on other payments which can exacerbate company cash flow problems.
- Company administration – If the company is asset-rich, the company administration process can help release value from company assets to boost the cash position of the business. Company administration aims to rescue the viable parts of a business to maximise returns for creditors.
The key to the successful rescue of a business lies with timing, so if you seek advice early, you can avoid the closure of your business. Debt restructuring can strengthen company cash flow and help prioritise more urgent debts that imminently threaten the viability of your business. Qualified insolvency advice can help grant a new lease of life to your business and make way for a prosperous future.
