Financial problems are never easy to deal with but they can happen to anyone. When the risk of insolvency looms nearby, you can find it hard to know what you should do. It’s easy to start thinking that there’s no light at the end of the tunnel. We’re here to show you that there is by explaining how to hand a potential insolvency crisis and come out on the other side as a winner.
What is insolvency?
Insolvency means that you are not able to pay debts when they are due or when your assets are worth less than your total liabilities. Your business can actually be profitable but problems in the cash flow can create a risk of insolvency. If your customers don’t pay on time or you end up over-investing in equipment, you could end up facing problems with repaying your debt even though the business is making money.
If you do find your business insolvent and unable to pay its debts on time, you need to immediately take steps to rectify the situation. Failing to take the proper action could affect not only your business but also affect you personally too.
Insolvency proceedings can begin when your business owes more than £750 to any creditor or group of creditors. They would ask the court to wind up your company through a process called ‘compulsory winding up’. Generally, creditors send a business that owes them money a ‘statutory demand’ first and if your business fails to pay the sum within 21 days, then the winding up proceedings can begin.
It’s also possible to begin the insolvency proceedings yourself. This can be a good option in cases where you find it impossible to avoid insolvency.
How to reduce the risk of insolvency
The good news is that you don’t have to wait until your business becomes insolvent. You can often avoid it or, at least, prepare for it by taking steps to reduce the risk of insolvency by focusing on sound financial foundations for your business.
It all starts with creating a good relationship with creditors. This means that you reduce the risk of them instigating proceedings against you immediately if your business has trouble making payments on time. When you have a good working relationship with them and you keep them informed of any problems you see on the horizon, they can trust you and work with you to find solutions to problems.
You should also be aware of the different options your business structure can provide. Here’s a short look at what insolvency can mean in terms of different structures:
- A limited company offers the best protection against you being personally liable for the insolvency.
- Partnership means partners are personally liable for the debts but this can be reduced slightly by choosing to trade as a limited liability partnership (LLP).
- Sole traders are also liable to a large extent although you can limit your risk with insurance to some extent.
It’s important to stay on top of your business finances and the wider markets you operate in. You have to constantly stay on top of the industry, knowing when things might be slowing down or picking up and using the information to build a sound financial foundation for your business.
What should you do if your business is likely to become insolvent?
Even after ensuring you limit the risk of insolvency, you might be faced with the likelihood of not being able to pay your debts on time. Never bury your head in the sand but start dealing with the issue at hand as soon as you notice the problem.
Your first step is to understand your prospects. Are you only facing issues making payments in the short-term? If the answer is ‘yes’, then you may want to consider:
- Looking into additional financing by taking out a new loan, factoring your debts, selling non-essential assets and so on.
- Negotiating with your creditors and seeking out revised payment terms, for example.
- Restructuring the business either through administration order or company voluntary arrangement.
If your long-term prospects are poor, you might have little option but to cease trading. Allowing your limited company or LLP to trade with no reasonable prospect of avoiding insolvency could make you personally liable for the debt. Therefore, you must act as soon as the risk of insolvency becomes clear to you.
What are your options as an insolvent company?
If your business doesn’t have a chance of surviving, it’s best to wind up the operations voluntarily. This winding up or liquidation means your business stops trading, the assets are sold and the proceeds distributed to creditors. You’ll have a licensed insolvency practitioner appointed to work as the liquidator, overseeing the process.
As mentioned above, it’s possible to enter administration. This is a process whereby the business gets a bit of breathing room to reorganise. The business or lender will appoint an administrator who will take control of the assets and the business dealings of the company. If the administrator is successful in putting the company back on the right footing, you’ll gain back control.
The other option is a company voluntary arrangement (CVA). This is a contract between your business and the creditors, creating a compromised path forward. This process is supervised by a licensed insolvency practitioner.
How to get help in handling a potential insolvency
When you want to reduce the risk of insolvency or handle potential insolvency, you should contact a professional specialising in it. They can help you reduce your risk, identify problem areas and give you advice on the best course of action. The earlier you deal with the issues, the quicker you come out the other side as a winner.
At Devonshire Green, we can help you organise your finances and advise you on matters of insolvency. Our talented team has worked with sole traders and small businesses for years and we know how lonely it can sometimes get. Contact us today and let’s make sure your business can navigate the risk of insolvency successfully!