What are the early warning signs of insolvency?

The Coronavirus crisis and lockdowns have hit the UK’s economy hard. While the government has introduced emergency Bounce Back Loans and other measures to protect companies in 2020, these will end in 2021. Deloitte UK forecasts that there could be a backlog of insolvencies.

If you fear insolvency could be on the horizon, it’s always best to take swift and decisive action. So how can you tell that problems are looming? And what must you, as company director, do about them?

At Insolvency Support, we’re experts in helping directors along the pathway to recovery. So we’ve put together our top 10 early warning signs of insolvency to help you take positive action as soon as possible.

The warning signs of insolvency

It can be surprisingly difficult to recognise that your business is nearing insolvency. You may know that something is wrong, but not be able to pinpoint the cause or realise the true extent of the issue.

The Institute of Chartered Accountants in England and Wales (ICAEW) has compiled its top six signs that a business is in distress, and we’ve added in a few that we regularly see when helping clients with their finances. Let’s take a look at these signs in more depth.

1. Cash flow problems. It’s perfectly common for companies to experience a squeeze on cash from time to time. However, if the problem is frequent or constant, then you’ve got an underlying issue that needs to be resolved.

2. Maximum borrowing. Again, business loans are a regular part of trading. But if you’re getting turned down for loans and are worrying how you’ll repay the ones you’ve got, you need to rethink your finances.

3. High interest payments. Perhaps you can still access loans, but the rates are sky-high? Or maybe banks and other lenders are insisting on higher levels of personal guarantee? That indicates that they are treating your company with caution. Will you be able to repay them?

4. Late payments. One of the most obvious early signs of insolvency is when you’re continually late in settling up with your creditors, or in collecting payments from your debtors. Sure, every company misses the occasional deadline due to cash flow issues or administrative errors. But if it’s becoming a regular occurrence for your business, chances are that you’ve got a problem.

5. Defaulting on bills. This is not only bad for your relationships with suppliers and your reputation, it’s also likely to lead to your creditors taking action against you. Insolvency Support can advise on pre-emptive action.

6. Sales too low – or too high. It’s tricky hitting the sweet spot. If your sales are too low, that’s clearly an early sign of insolvency. And if they’re high, that’s great – but you need to invest in your company so that you can keep up, otherwise you’ll struggle to fulfil your orders.

7. Falling margins. It’s easy to be fooled by high sales into thinking that your business is booming. But if costs are high, too, you could soon end up in the red. Always look at your bottom line, not just your turnover.

8. Poor record keeping. If your accounts or other management information are late or inaccurate, this suggests you’re not fully on top of your financial situation. Who knows what you’re failing to spot?

9. Losing a major client. Not only is this a common cause of financial woes, it could also be a symptom. Why did they leave – was your company not able to meet their business needs?

10. Unhappiness. If your staff turnover is high, the mood in the office is tense, and you’re lying awake at night worrying, then you need to work out what’s going wrong. Insolvency Support are experts in getting to the bottom of companies’ woes, transforming the lives of their directors.

Of course, there are several other signs of insolvency that you might spot in your own business or others. Any recurring poor performance is an indication that all is not well – and that could mean your company is heading for debt and possible closure unless you take action fast.

How can I get help for my struggling business?

So what should you do if you realise that your own company is showing one or more of the early signs of insolvency?

Fortunately, there are several ways you might be able to get your business back on track. Insolvency Support can examine your company to find the sources of the problem, and provide expert advice on the options available, tailored to your unique situation.

Turnaround finance or capital is a short-term option for companies that are in financial distress and perhaps even facing the threat of legal action from creditors. There are several forms, including invoice factoring and discounting. It’s a very specialised area, and lenders will have exacting requirements; Insolvency Support can advise you on this.

Refinancing your business or capital release could be a valid option if you have cash flow issues and your assets are tied up, for example in property. There are several forms of refinancing, but they all have the same effect: increasing your company’s liquidity.

Company Voluntary Arrangements are an option if your company is insolvent but could be viable in the future. They involve you renegotiating the terms of your debt with your creditors, then paying them back in one recurring monthly payment over an extended period.

Administration entails handing temporary control of your company to an insolvency practitioner, who will settle your debts and could restructure your business. Pre-pack administration is a legal way to salvage the valuable parts of your company while paying creditors.

All the above have their pros and cons, so make sure you get expert advice about which is the most appropriate for your unique business needs.

Sadly, you may need to consider ways to close down your company . Insolvency Support can help you do so smoothly, cost-efficiently and in compliance with regulations. The quicker you take back control, the quicker you’ll be able to start the recovery process.

Talk to Insolvency Support today

If you’ve spotted signs of insolvency in your company, you’re probably deeply concerned about how to put them right.

At Insolvency Support, we’ve got the financial expertise and experience needed to transform directors’ lives. Contact us today for tailor-made advice on how to get your company on the path to recovery.

“The best thing I ever did was speak to the team at Insolvency Support, my whole life has changed for the better and I feel I’ve finally got purpose again”

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