The word insolvency is scary and stressful – no business owner wants to be dealing with a company in financial trouble that may become insolvent. In my extensive experience helping businesses manage insolvency, I’ve seen it all, and I know when it’s still time to fight and when it’s time to quit.
Let’s talk about how you decide what to do next if you’ve run into financial trouble.
What is insolvency?
Insolvency is a financial state of being unable to pay debts when they are due, but it doesn’t automatically mean that your company will go bankrupt.
Types of insolvency
There are two primary types of business insolvency:
1. Cash-flow insolvency. This situation happens when a company doesn’t have cash available to pay debts when they become due, even though assets may be greater than liabilities.
There are several ways to fix cash flow insolvency, such as:
- Improve credit control. Work with your customers to reduce their outstanding debt
- Reduce liabilities. Negotiate with creditors for longer payment terms.
- Get financial assistance. This could be getting a government grant or loan or help from a non-profit organisation.
- Sell the company. This may be a viable option if the company isn’t balance-sheet insolvent.
2. Balance-sheet insolvency. If your company’s total liabilities exceed its total assets, you’re balance sheet insolvent – in other words, you have negative net assets. This is an unsustainable position in the long-term, although it doesn’t necessarily mean a company can’t pay its debts in the short term.
Here are some specific steps that a company can take to fix balance sheet insolvency:
- Sell assets. This is a quick and easy way to raise cash, but it may not be the best option if the company needs to sell its most valuable assets.
- Raise capital. This could be done by issuing new shares, taking out a loan, or getting a government grant.
- Bring in new partners. This can be a good way to get fresh capital and expertise into the company.
- Negotiate with creditors. This may involve extending the terms of debt repayment or agreeing to a debt restructuring.
- File for bankruptcy. This is a last resort, but it can be a way to protect the company from its creditors and give it a fresh start.
What causes a business to get into financial trouble?
It’s common for startup companies to run into financial problems in the first few years of trading, but there are stories every month of larger, well-established businesses also going into administration or receivership because of cash flow problems. Some of the reasons why businesses fail include:
- Unable to produce goods or services quickly enough to keep up with demand
- Inadequate controls on spending on R&D and marketing to launch new products
- Financial mismanagement resulting in poor credit control or supplier negotiations
- Defaulting on a loan causes the lender to demand full repayment
- Declining sales or increased competition
- Sudden unexpected expenses due to unforeseen events such as COVID or wars
- Insufficient cash reserves, perhaps due to overpayment of dividends to shareholders.
How do you spot the signs of insolvency?
There are several early warning signs of insolvency, including hitting your limits on company credit cards and your overdraft, being refused credit by your suppliers, being unable to get bank loans and being unable to fulfil customer orders because you can’t afford to make or ship goods.
If things don’t improve, you may find yourself unable to pay staff on time, getting bailiff demands and receiving demands from creditors.
Things to consider when looking at insolvency
If you are facing insolvency, all is not lost – there are things you can do to turn it around. Consider the following to get a thorough understanding of your situation:
The cause of the insolvency
Understand why the business is insolvent so you can develop a plan to address the problem. The cause could be several factors, such as declining sales, increased expenses, or a sudden unexpected expense.
The financial situation of the business
Thoroughly understand the current financial situation, including its assets, liabilities, and cash flow. When you are on top of the finances, you can make informed decisions about the future of your business.
The options available to the business
Consider your options, such as restructuring, selling the business, or filing for bankruptcy. The best option for the business will depend on the specific circumstances.
The impact on others
Insolvency can have a significant impact on employees, customers, suppliers and others connected to the business. Consider how insolvency could affect stakeholders before making any decisions about the future of the business.
The future of the business
If the business is able to survive insolvency, you must develop a robust plan for the future of the business that addresses the issues that led to the insolvency and puts the business on a path to financial stability.
The last resort for businesses?
Filing for bankruptcy is typically seen as a last resort for businesses facing insolvency. If your business is unable to pay its debts or your liabilities exceed your assets, you may need to consider bankruptcy
What is bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to get a fresh start from their debts. It gives you protection from your creditors and space to reorganise your finances.
Are you temporarily low on cash, or are the financial problems more long-term? If you believe your financial situation may improve in the future – perhaps there’s an economic downturn, or you’re waiting for payment from several large clients – declaring bankruptcy might not be the best solution. Bankruptcy has a huge impact on business owners, staff, customers, suppliers and other stakeholders, so it’s not a decision to be taken without very careful thought. If you are considering declaring bankruptcy, first put some thought into:
The cost of bankruptcy. The legal process can be expensive, so you should understand the likely costs before making a decision.
The impact on your personal finances. Your personal finances, including your credit score and your ability to get loans or mortgages in the future, can be adversely affected.
The reputational effect. You should carefully consider the effect of bankruptcy on your personal reputation before making a decision because going bankrupt could lower your standing in your community.
Speak to an insolvency expert
If your business is facing financial difficulties, get early advice from an insolvency firm, to fully understand the implications of insolvency. Insolvency experts will discuss other potential options and guide you through the bankruptcy process if you decide it’s the right step for you.
Explore other options
Bankruptcy should be the last resort – there may be alternative course of action.
Restructuring. Change the way the firm operates in order to become more profitable- cut costs, adapt products or services, or expand into new markets.Debt restructuring. Negotiate with creditors to agree to a new repayment plan- extend the repayment period, reduce the interest rate, or write off some of the debt.Vendor financing. Obtain loans from suppliers in exchange for future sales. This can be a good option for firms that are struggling to get traditional financing.Asset sale. Sell assets, such as equipment or real estate, to raise cash – make better use of valuable assets that are not essential to your core business.Merger or acquisition. Join forces with another firm. This can be a good option for firms that are struggling to compete on their own.
Experts in business insolvency Sydney
Remember, insolvency is overwhelming, and bankruptcy has serious implications, so you should always seek professional advice from qualified insolvency experts before deciding it’s the right path for your business. Get in touch for a discussion about the pros and cons of insolvency and business bankruptcy.
If your company is in financial difficulties and you need an expert in business insolvency in Sydney, or other states, contact me on 0448 000 010, message me on LinkedIn or email me at eddie@eddiesentore.com
