How to spot warning signs of company insolvency

By Mike Smith

Failure to recognise the warning signs of insolvency could leave you personally liable  for company debts, so it’s essential you know what to look for.

If there’s one worry that plagues business owners above all else, it has to be insolvency. Small businesses, even those that are seemingly profitable and successful, are never too far away from insolvency. In some instances, all it takes is the loss of a major customer, an unexpected expense or a series of late or non-payments from debtors to reverse their fortunes and push them towards the brink.

Thankfully, an impending insolvency does not necessarily mean an end to your business. However, solutions can only be put in place when the insolvency is identified in the first instance. If your company is insolvent, you must act to maximise your creditors’ interests. Failure to do so could lead to personal liability for a proportion of the company’s debts, so it’s essential you know the warning signs to look out for.

Here are five common signs that your company is insolvent…

You have maximised your borrowing

Borrowing money and using credit facilities is a very important part of running a successful and growing business; but, if you have reached your funding limits, are being refused credit by suppliers and cannot obtain a secured short-term loan, insolvency might not be far away. An inability to source more funding can mean essential payments are not made and escalatory legal action is taken.

You face increasing creditor pressure

If you are unable to pay your bills when they fall due, you will face increasing creditor pressure until the payments are made. If one of those creditors is HMRC, it will charge interest and apply penalties to the late payments which will only make the situation worse. It also has far-reaching powers to recover debts. If a statutory demand from a secured or unsecured creditor goes unpaid, a winding up petition can be issued against the company to close it down.

You cannot pay staff

If you cannot afford to pay employees then your company is already technically insolvent. It is common for company directors to not take a salary for months in an attempt to make key payments, but constant firefighting when there’s no sustainable solution in place will only end one way.

The business is not being managed properly

Not every sign of a struggling business is financial in the first instance. If relationships between company directors have broken down or one director is being made to carry the brunt of the burden, this is a sure sign that all is not well. Insolvent companies commonly have problems with:

• An inability to solve problems effectively;
• An inability to treat creditors equally;
• Decisions being made based on inaccurate information;
• Constant problem solving distracting directors from running the business.

Debtors regularly pay you late

It can be very difficult to pay your own bills and make plans for the future if your customers rarely pay you on time. If your credit control process is not up to the job, you’re likely to suffer from a lack of cash-flow which can cause late payments to your own creditors and leave you unable to pay rent, wages, tax liabilities and other essential expenses. In this case, insolvency is certainly not far away.

Recognise any of these common signs of insolvency in your business? Our advice is to seek professional assistance immediately.

Mike Smith is a director of Company Debt