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What is insolvency?

Published on 15th October 2018

Developing a proposal into a thriving business venture at the heart of your local community takes passion, commitment and many hours of hard work. But, for any of it to pay off, staying on top of operating expenses, whilst also having enough funds available to support further investment, is crucial. That’s why, if you’re unable to generate enough capital and settle your financial obligations, it’s absolutely soul destroying for you and your team to hear that your business has become insolvent. But if you’re facing insolvency or expect to do so in the near future, there are steps that you can take - insolvency doesn’t need to be the end of the road.

What does becoming insolvent mean?

Insolvency is something that every business owner dreads and involves filling a bankruptcy application. It’s a situation that usually arises when your business becomes unable to resolve the liabilities that are logged within your balance sheet as and when payment is expected by the creditor. This could be as a result of account liabilities such as staff wages, purchases, tax demands, utility bills, supply costs, unpaid business-to-business (B2B) invoices, lawsuits or even existing finance agreements. Therefore, insolvency essentially means that you’re unable to resolve all of your business’ operating expenses on time without running out of money or missing other payment demands in the process.

Nevertheless, it’s worth noting that insolvency doesn’t always give lenders the grounds necessary to push for involuntary bankruptcy or force a liquidation of your business’ assets, and should be discussed with your accountant.

Is your business at risk of becoming insolvent? Need access to additional capital? Apply for Working Capital Finance or learn more about how your business could benefit.

How can I tell if my business is at risk of insolvency?

Every business is bound to run into periods of uncertainty, which could potentially affect your ability to generate enough revenue to maintain your bottom line. But if this occurs over a sustained period, insolvency becomes a real possibility. Yet, in order to combat this scenario, you need to able to recognise the signs of insolvency as early as possible. To do so, there are two tests that you and your accountant can carry out:

  1. Total Cashflow/Total Liabilities - Calculate your business’ total cash flow and subtract your current and future debts (e.g. staff wages, corporation tax and existing finance agreements). Do you have any money left over or is there not enough capital available?
  2. Current Liabilities/Total Liabilities - Do your liabilities exceed the total worth of your Current Assets (cash, prepaid expenses, inventory, etc) which can be converted into capital within 12 months?

If after carrying out any of these tests your total liabilities are deemed to be in excess of what you’re earning or able to raise, it essentially means that your business is loss-making. Left unchallenged, you risk insolvency in the near future. Fortunately, there are a variety of ways in which you can support your business’ bottom line and target the root causes of your financial situation - providing you know where to look.

How can I support my business and avoid becoming insolvent?

As a business owner, your focus will mostly be spent on managing day-to-day operations and ensuring your levels of productivity. The problem is that this also draws your attention away from another crucial aspect - your business’ finances. As a result, discovering that your business is heading towards insolvency can easily catch you off guard. But rather than allowing yourself to panic, taking charge of the situation and working out a suitable course of action is your ticket to success.

This is why many business owners who are worried about the prospect of becoming insolvent choose to apply for Working Capital Finance. Working Capital Finance offers you access to a variety of business finance solutions that could enable you to raise the funds your business needs to move forward and succeed. This includes products such as Invoice Finance, Merchant Cash Advance, Asset Refinance and Overdraft Replacement. But in order to make an informed decision and choose a suitable pathway for your business, understanding how each of these products function is essential, which is why speaking with a qualified business finance professional is so invaluable.

Need help overcoming the risk of insolvency?

Maintaining a fully functioning business isn’t easy, even for experienced business owners. But in order to ensure a sustainable future and thrive, overcoming all of the obstacles standing in your way is vital. Yet if your business is loss-making, especially over a sustained period, the risk of insolvency becomes a very real possibility. That is unless urgent action is taken. Thanks to the Alternative Finance Industry you now have access to a wide range of business finance solutions, giving you more ways to overcome the risk of insolvency than ever before. All you need to do source a suitable finance solution for your business from a lender you can trust.

At Rangewell, we’re an Access to Finance specialist. We’ve mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the entire application process. So if you’re business is at risk of becoming insolvent and needs access to quick cash, apply for Working Capital Finance today or find out more with Rangewell.

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