Insolvency describes a scenario in which a company is unable to pay its debts, often leading to bankruptcy. This is usually used for businesses to describe companies where the amount owed or the outgoings exceed the assets held or the incomings, and might be determined to be bankruptcy in a court of law dependent on other factors. There are two types of insolvency,'cash flow insolvency' and'balance sheet insolvency' which describe two slightly different situations.
With'cash flow insolvency' a company finds themselves unable to pay their debts, whether these are to clients, business partners, service providers, lenders or landlords. This then obviously creates a serious problem and legal issues regarding how the debt will be repaid.'Balance sheet insolvency' meanwhile describes a situation where the company or individual has negative assets - meaning that their liabilities exceed their assets putting them in the red. Again over time this will drain resources and means that the company is unable to continue running in its current position. A company can be cash flow insolvent but not balance sheet insolvent (the opposite being'solvent') if it has illiquid assets (assets that can be sold at a price other than their obvious'value'). Similarly a company could be balance sheet insolvent but be cashflow solvent if they have enough income coming in to pay their debt obligations. In fact many companies continue to run permanently in this state though it is obviously not ideal.
Fortunately there are many solutions to insolvency of both kinds that can help prevent your company from having to declare bankruptcy (which it may have to do in cases where you are unable to pay back debt), most of which involve restructuring of some kind.
Applying for a loan for example can help you to escape insolvency if it enables you to pay off your other debts. Of course the danger here is that in the long run you will have more to pay back as you will simply be adding to your debts. However if you have a business plan that would see your cash flow improve if given time and you're confident this can work, then this could buy you the time to fix your problem. Alternatively you can use this as a 'band aid' of sorts while you look into altering the runnings of your business.
Becoming a public company rather than a limited one can also be a great way to get a cash injection as other investors invest in stocks and shares and give you more cash to play with - of course this also has other implications so won't be suitable for everyone. You can also look for other private investors or try to go into business with other companies. Selling elements of your company too can get you some quick cash, as can cutting overheads in a variety of ways. There are a range of solutions and a third party advisor can help point out those best suited to your business and situation.
Debt restructuring is similarly a clever way to rearrange debt, consolidate loans, cancel certain debts, make the most of loopholes and generally make your overall owed amount a lot easier to handle and less to pay off. Again, there are many third party services that can help you do this and can pay for themselves if it means you won't have to declare bankruptcy.
There is a large difference between business insolvency solutions and the options available to those looking for personal insolvency measures. Visit us: http://www.privatebroker.com.au/ .
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