What is Insolvency and How to Deal with it as a Business

Insolvency. A term that no individual or business will want to have surrounding them. Insolvency is when a business can no longer pay its bills to lenders which creates debt. 

Insolvency is not a desired situation for any business to be in but with the right advice and team to support you with it, it can be manageable. Read on to find out more about how to overcome the  obstacles that come with insolvency.  

Types of insolvency

  1. Cash-Flow insolvency – This occurs when a business has enough assets to pay off creditors but it is in the wrong form of payment. This means that the business lacks the cash on hand to pay lenders but the business also has considerable assets which could be used to renegotiate payment. 
  2. Balance-sheet insolvency – This refers to a business not possessing the cash or assets to pay off any debts. This means that they have negative net assets and more often than not, this may lead to bankruptcy. 

Factors leading to it

  • Insufficient accounting or staff: Having staff that lack skills and experience can lead to errors surrounding budget or expenses. 
  • Lawsuits: Big lawsuits against any company have the potential to cost businesses a lot of money which results in insufficient funds following a payout.
  • Loss of customers: Failing to evolve as a business over time to meet the ever changing needs of customers can lead to fewer customers engaging with what a business is selling therefore, creating a lower market share and in turn, profits.
  • Increasing production costs: An issue that has been ever-present throughout the latest pandemic which resulted in higher production costs. This issue causes reduced profit margins which means a lower income for the business. 

How to deal with it

  1. Administration – The most common procedure, administration is designed to rescue and restructure a company. An administrator is appointed to achieve better results for creditors and whilst administration is ongoing, the business is protected from anyone enforcing their right over the company’s assets.
  2. Liquidation – A liquidator is appointed with the objective of selling a company’s assets to third parties in order to make up as much of the debt as possible. The business will continue trading until dissolution is complete. In the UK, 1 in 341 active companies entered liquidation between October 2020 and September 2021 which proves its prevalence.
  3. Company voluntary arrangement (CVA) – A company enters an agreement with its creditors whereby an insolvency practitioner supervises the business with the aim to prevent the business from entering liquidation. 

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About the author

I have always been a shopaholic. A lot of times my questions went unanswered when it came to retail questions, so I started Talk Radio News. - Caitlyn Johnson

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