The Edge of Insolvency
Through times of economic uncertainty or distress, it’s important that business directors and management understand that at some point, the business could face financial problems, or even insolvency. When a business is in this position, pressures can mount from creditors, suppliers and customers, pushing the business closer and closer to the metaphorical cliff edge of insolvency. At this point, it may be hard to see a way forward, however, by taking immediate action, there may be a safety rope available!
Understanding when a business is insolvent and the obligations of directors towards the company and its creditors is crucial for making informed decisions during a challenging economic period. A company is deemed insolvent when it can't pay its debts as they fall due or when its liabilities exceed its assets. Knowing where the edge of insolvency is will help determine what advice and steps should be taken to protect the position of the company's creditors and avoid potential personal liability for directors. It's therefore important to take action before the company reaches the point of no return, ensuring the right decisions are made to improve its financial health and support continued trading.
Recovering from Insolvency or Financial Distress
For businesses to manage and maintain financial health during economically difficult times, directors should be taking the following practical steps:
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Understand when a business becomes insolvent
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Ask for professional advice and guidance
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Stay up to date with the financial position of the business and the challenges impacting it
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Review cash flow regularly
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Communicate with shareholders, banks and other lenders in order to maintain trust and keep them informed of the business’s financial situation
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Create contingency plans for dealing with predicted economic issues
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Do not neglect director’s duties of compliance
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Communicate with customers and suppliers
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Prioritise paying creditors and key suppliers.
In order to save an insolvent business, it’s important for directors to ask for assistance from licensed insolvency practitioners at the earliest possible opportunity in order to increase the range of options available. By paying close attention to signs of insolvency and seeking professional advice at this early stage, it may be possible to avoid actual insolvency.
Prioritising Creditors
Recognising that a business is close to the edge of insolvency is important for influencing the next steps to be taken. For example, by recognising financial problems early, directors can work to protect themselves from potential personal liability by working to pay debts owed to creditors before the company reaches the point of insolvency.
When directors recognise the potential for financial distress, it’s important for them to ensure that communication with creditors remains open. By keeping an open dialogue with lenders, it may be possible to come to a new agreement for repayment of debts, ensuring that credit lines remain, providing the chance for the business to get back on track.
In order to understand the right finance agreements for the financial situation they find themselves in, businesses should ask for professional advice. Insolvency practitioners can help directors to review the terms of their finance agreements with creditors.
Help Keeping Your Business Solvent
With such a challenging economic situation, many businesses are struggling, but by reaching out to a licensed insolvency practitioner at the earliest opportunity, businesses have more options and stand a much better chance of staying away from the edge.
To discuss the financial issues facing your business and learn about the best steps to take going forward, you can call BEACON on 02380 651441.