Managing a business is no easy feat. Not only do you need to manage the actual work: the products and services and customer satisfaction, but you also need to keep employees trained, safe, and healthy; you need to manage the financial accounting; more often than not, you’ve got to deal with some form of online presence (it is 2021, this is almost not avoidable), plus deal with advertising, marketing, and sudden, shocking turns in the market that no one could have predicted (like a pandemic that put the whole world on pause, for instance). Sometimes hiccups are overcome with hard work and staying the course; sometimes, they aren’t. If your business is struggling to make ends meet and pay off outstanding debts, you might actually be insolvent.
The following will explore what insolvency means and what your options are if you find yourself in an insolvent situation. Of course, every business is different, and this means that, while helpful, this information isn’t taking into consideration the specific context your business operates within. For the best results, seek out financial consultation from a creditable financial professional.
What Is An Insolvent Company?
When a company is in the situation where they won’t be able to meet financial obligations they’d made previously to lenders, that company is considered insolvent. In simpler terms, if you can’t pay off your debts by the deadline payments are due, your company is insolvent. Another way to look at it would be to consider someone whose total assets (cash and items of value) are greater than their liabilities (what they owe).
It’s important to note that being insolvent and going bankrupt are not the same thing. Sometimes insolvent companies choose to pursue bankruptcy, but not always.
What Can A Company Do If Their Insolvent?
If your business isn’t able to pay off its debts, there are a few things that you can do. The only thing you cannot do is nothing. You’ll have creditors (or collections agencies) hounding you if you consistently miss payments, and they are extremely good at finding you and getting ahold of you. You won’t be able to avoid this type of stress by ignoring it, as pointed out by Antony Batty, and that you also don’t want to wait too long to take action. The sooner you analyze your options and choose a course, the sooner you can get out from beneath the stressful thumb that is owing more than you can afford to pay.
Typically there are two pathways you can take to dealing with insolvency, both have their pros and cons, and the final decision depends heavily on your business and long-term goals. The first option is working with your creditors in order to restructure your debts so that you can pay them off. Sometimes all we need is a little bit of help, and we can pay most of our debts back (in many instances, creditors will accept a smaller overall payoff as opposed to receiving nothing or accepting a slower payoff instead of getting nothing).
The second option is bankruptcy. This involves petitioning the court in order to declare bankruptcy. The term can sound quite scary, and in one sense, it is, but it’s also not as uncommon as you’d think. Many business owners have declared bankruptcy and later gone on to great success with another company. Depending on which country and state you live in, this process will be slightly different but will typically involve selling off whatever assets the court deems appropriate. This is called liquidation. Any money made is divided up between your creditors; you typically need to attend a credit counseling service or two, and then you’re done. You no longer owe anything.
What If I’m Not Insolvent, But I Might Need Liquidation?
A solvent company is one where assets owned by the company are more valuable than the debts owing, meaning you’d be able to pay off any creditors in full within a year of the debt being due. This doesn’t necessarily mean that the company is in great financial shape, and it doesn’t mean liquidation isn’t a possibility. Sometimes a company can foresee that their financial situation is about to change in the future (let’s say losing a major client or a service being replaced by a less expensive automatic option on the market). Sometimes directors or shareholders might want to retire and transfer the value of the company to themselves, or perhaps they want to start fresh with a new company. In these situations, a Members’s Voluntary Liquidation can occur. This is a formal process that involves closing down the solvent company and extracting cash or assets from a company (occasionally in a way that reduces taxes needing to be paid).
The above information should help you understand your situation when it comes to your business’s solvency situation. In the process, you can deal with this matter without experiencing any hardship or unnecessary challenges.