When a company’s liabilities exceed their assets and they are unable to repay all money owed to creditors (even if they were to sell off all assets), they are legally insolvent. The consequences can be severe and in some cases, a company may not be able to recover, so it’s important to be aware of the warning signs of business insolvency and seek advice from an insolvency practitioner on the right procedures to take.
Watching out for these warning signs is easier said than done, especially if directors are heavily involved in the day-to-day running of a company without having the time to look at the big picture. Read on for our guide to the issues that could suggest your business is facing financial difficulties or even insolvency.
Creditors demanding payment
If you are failing to pay creditors the debts owed to them when they fall due and you are receiving demands for payment and threats of legal action should you not pay, then this is certainly a sign that your company is experiencing financial difficulties. If you notice that you are increasingly taking longer periods of time to ensure creditors are paid and regularly find yourself facing complaints from creditors, then you could be facing business insolvency.
If you receive a statutory demand from a creditor, it is vital that you do not ignore this, as this will most likely be followed by a winding up petition. Should the courts order that your company is liquidated, then this would most likely spell the end of the business. It’s important to seek guidance from an insolvency practitioner as soon as you start struggling to pay creditors on time.
HMRC are chasing payment
If HMRC are demanding payment, then this is certainly a clear sign you are facing business insolvency. Whilst some creditors may give more leeway for payments, HMRC are extremely persistent in ensuring debts are paid. The penalties associated with failure to pay taxes on time can be extremely significant, no doubt making a difficult financial situation much harder.
Refusal of borrowing or credit
If your business is at the stage where your overdraft limit has been reached and banks refuse to lend more money without you providing a personal guarantee, then it may be extremely difficult to avoid insolvency. If you lack the assets to provide a personal guarantee for a loan, then this is another strong warning sign for insolvency.
Whilst you may ask suppliers for credit to provide more time and allow your business operations to continue, if you cannot pay what is owed after a period of time, it is then likely that you will face a statutory demand or even legal action.
You are unable to pay staff wages on time
If you are unable to pay staff their wages on time, this is a strong sign that insolvency is close. Even if you have forgone your salary for a period of time to ensure that other staff do get paid, with the hope that your financial situation will change in the near future, this is a gamble that rarely pays off. Once you are unable to pay employee wages, your business is technically insolvent.
Business Insolvency Specialists
If you are experiencing any of the warning signs above or your business is facing other financial difficulties, it’s important to ask for professional guidance from an insolvency practitioner.
BEACON are specialists in business and company insolvency solutions. Along with helping you conduct the right tests to determine if your business is insolvent, BEACON will help you find the right options for your business going forward.