Insolvency Explained

The thousands of individuals who start their own business in the UK each year do so with very high hopes. They are going to be their own boss and this has numerous advantages, however the sad fact that while they start out hopeful around 20% of these business fail within the first 2 years. There can be many reasons why businesses fail and one of them is poor money management. Even the best business idea will be doomed to failure if there are cash flow problems. These businesses are then faced with insolvency when outgoings and bills mount out that cannot be paid due to a lack of funds coming in. But what exactly is insolvency?

Insolvency and bankruptcy are very often linked together, however insolvency is basically a term that would describe the financial difficulties that those in business face. Bankruptcy is actually a position one can find themselves in due to being unable to pay debts. The problem behind both however remains the same.

There are basically three key terms that have to balanced when it comes to avoiding insolvency:

• Assets – The assets are everything that is of value that a company owns. Assets could include such things as buildings, machinery, equipment, land and even a brand name
• Liabilities – These are what the company owes out. liabilities could be money borrowed from loans, payments owed for materials/supplies and even tax that is owed to the Government
• Liquidity – This term describes how easily assets could be turned into cash money. It doesn’t matter how much assets the company has if it cannot quickly convert these into cash to meet the companies liabilities

Any business has to pay out. The outgoings could be in the form of buying supplies and materials, paying rent/mortgage on your business property or paying wages for staff. However to be successful all businesses have to make money not only to be able to clear their outgoings/debts each month but to make a profit and be ahead. Should the outgoings be more than what you have coming in then this in when the company will face insolvency if they are unable to meet their debts.

When it comes to insolvency there are different stages that a company could have to go through. However before this stage is reached when the business first finds itself in problems it is essential to get the very best debt advice and ask your financial advisor any debt management questions you have. There could be many ways you could stop your company from suffering further financial distress if you have knowledge on your side. You could avoid insolvency by making a cash flow plan and sticking with it, for example. If insolvency cannot be avoided then here are the steps that could follow:

• Your company could go into liquidation. This means that the assets of the company would be sold so that creditors could get their money back. However there are various different types of liquidation. Compulsory liquidation could come about if your creditors take you to court to try and get back the money you owe. Your business would be forced to shut down and your assets then sold off.
• Informal arrangements could be made between the company and creditors which would enable the company to pay off their debts
• A company voluntary arrangement could be made which is similar to an individual voluntary arrangement. The company would then use an insolvency practitioner
• The company could go into administration which would mean that an application to the court is made to suspend payments to creditors for a period of time.
• Receivership means that the company’s creditors would ask for a receiver to be sent in to take over the selling of the assets of the company so creditors can get their money back

When considering the complexity of the above and what is at stake then you can see why taking the advice and help of a debt specialist and asking any debt questions that are on your mind is essential.