5 Signs That Your Business May Be Insolvent

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Insolvent. It’s a word no business leader wants to think about. While insolvency doesn’t necessarily mean a company is failing, the consequences can be severe. It might result in liquidation or the business being sold after going into administration.

One of the issues is that insolvency can creep up on directors without them noticing the signs. While a licensed insolvency specialist like Bridge Newland helps businesses get out of this hole, it’s important to spot any indications of insolvency as soon as possible. The quicker this is done, the more chance a company has of surviving the situation.

With that in mind, below are five signs your business might be insolvent.

1. A lack of cash flow

Are you failing to pay your creditors on time? Instead of the typical 30-day terms which are imposed, are you taking 60 days or longer to cover your debts? In that case, it’s likely your business is suffering from cash flow problems.

This is typically the first sign of a potential insolvency issue. As a result, it’s essential you monitor your company’s financial position on a regular basis. Furthermore, there are solutions readily available to help against poor cash flow. For instance, if late-paying customers are the root of the problem, you could utilize invoice financing.

2. Staff wages cannot be paid

Insolvency is on the horizon for any business that cannot meet its wage bill. You might have tried everything to keep paying your employees – and that includes not taking your own salary – but there’s no money left to cover everyone’s paycheck.

This is bad enough as it is, but your business is technically insolvent already once those wages go unpaid.

3. Maximum borrowing limit has been reached

If you’re unable to secure any further borrowing, this is a big indicator your business is heading for insolvency. Say your bank overdraft has hit its limit, lenders won’t borrow any money without personal guarantees in place, and suppliers are refusing any type of credit agreement. The result: the walls are closing in, and few options are available.

If your business possesses enough sufficient assets, there is the possibility of securing a loan against them. Otherwise, insolvency is the likely route.

4. Demands for payment

Whether it’s threats of legal action from a supplier due to unpaid bills or a secured/unsecured creditor has issued a statutory demand, payment demands are a bad indicator for any business. If they’re left chasing long enough, this will sour relationships and harm the efficiency of your business, but it will also lead to much bigger concerns.

5. An absence of reliable management information

Problems can quickly arise if your business has no systems that detail vital information about financial performance. Sales forecasts, bank reconciliation’s, aged debtors’ reports, cash flow forecasts – all are required for directors to confidently make decisions.

When this information is missing, it’s impossible to see the full picture in terms of your debt and how much you’re owed. This can cause insolvency to sneak up without any warning. 

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