How to avoid insolvency

One of the harsh realities of starting a company is that it may either no longer be able to pay debts when they are due, or have sufficient assets to cover its liabilities, and can become insolvent. But how do you know if your business is facing insolvency?

The insolvency cash flow test

The first test is called the cash flow insolvency test, is where if you are unable to pay your debts when they are due (or within the reasonably near future) then it is likely that you are trading insolvently.

The insolvency balance sheet test

This test looks at your assets and your liabilities (taking into account all contingent liabilities). If your liabilities exceed your assets then you are likely to be unable to pay creditors even if your company assets were sold.

It is important to review the results of both tests rather than independently. You may seem solvent on the balance sheet test, but be proven otherwise on the cash flow test.

If you are found to be insolvent, but your business is still trading (otherwise known as ‘wrongful trading’) then as a director you can be found personally liable for some, or all, of the company’s debts under the insolvency Act 1986. Therefore, knowing your director’s duties and if you are likely to become insolvent is extremely important.

If you act quickly when your company is in financial trouble and showing the first signs of insolvency then you stand a better chance of business survival. If the signs are spotted early enough then you will be pleased to hear that there are several strategies that can be implemented to turn your business around.

If your business is in debt then your first route of action should be to consult an insolvency practitioner who can review your business and help to identify problem areas within the business. If you are unable to settle debt with your creditors then they are likely to stop their funding and may even request for your business to be wound up in order to pay its debts so it’s important to act now.

Warning signs that your business is or may become insolvent

Generally, if you are having trouble paying creditors, or are suffering cashflow problems, then you should consider the following scenarios to discover if you are at risk of company insolvency.

• Is your business bank overdraft always close to its limit?
• Is your business unable to extend existing credit agreements or access new credit?
• Is the time you take to pay your suppliers growing?
• Are creditors calling your business daily to demand payments?
• Are you having problems paying HMRC?
• Has your business received any HMRC late payment penalties?
• Has your business had numerous failed dealings with creditors?
• Is your business looking to the next big sale or debtor payment to solve finances?
• Does your business have problems ordering stock due to unpaid debts?

The above list of warning signs are not exhaustive, and whilst some of these signs may not mean that you are currently insolvent, they are good indications that your business is in financial distress and needs to do something immediately to avoid business failure.

Company insolvency doesn’t have to mean the end of the road

It is important that as a business you accept the situation and take immediate steps to resolve your financial difficulty. When you are unable to keep up with your financial obligations then your business risks being wound up or forced into liquidation. However, with the right help you can get back on track and this doesn’t have to mean the end of the road. There are a number of solutions and strategies that can be adopted to encourage business survival:

Alternative Business Loans
When the relationship with your bank is waning and you are having problems with traditional methods of business funding, alternative business loans can provide emergency funding to help get you out of a tight spot and avoid possible insolvency. A fast turnaround can provide funds into your account within 24 hours to ease your cash flow worries.

Asset Finance
When your business needs additional cash to meet its obligations and repay debts, yet you are in financial distress, asset finance is a common solution to consider whereby your loan is secured on your business assets. It is important to remember that any assets secured on the loan can be retrieved if re-payments are not met.

Invoice Finance
Getting paid and having a healthy cash flow is important in remaining solvent. Unfortunately many businesses suffer from late payments. This form of finance operates like a credit card as you only pay interest on the amount that you borrow.  Invoice factoring or discounting is a solution that can provide your business with an advance of up to 85% of your invoice values to help with when your debtors are not paying on time, keeping your cash flow positive.

Company Voluntary Arrangement
A Company Voluntary Arrangement is a legally binding agreement with creditors to pay debts to the level over time that your company can afford whilst the balance is often written off. Creditors often agree to this solution as they are happier to receive some payment as opposed to nothing in a liquidation, and if a business is considered viable then a CVA will be considered. Even if you have been threatened with a winding up procedure you still have time to set up a CVA if you act fast.

HMRC Time to Pay Arrangement
If your business is failing to meet HMRC’s payments for PAYE, NIC or VAT then it is a good signal to HMRC that you may be insolvent. Failure to make payments can result in penalties and you can face being hit with charges or having your assets seized. However, with an agreement to spread the costs of the arrears over a specified time period, called a Time to Pay Arrangement, you will be able to manage your company’s finances and avoid an insolvent liquidation.