Dealing with business insolvency requires a clear understanding of the processes and measures for managing financial distress. In the UK, insolvency rates remain volatile, with further increases expected in 2024.
This article provides essential guidance on preparing for insolvency, managing risks, and exploring available options and resources, based on the latest trends and insights.
What is Business Insolvency?
Business insolvency occurs when a company is unable to pay its debts promptly or when its assets are less than its liabilities. It is one of those trouble signs that is serviced with severity for more injurious costs should be avoided.
Understanding business insolvency is crucial as it can prevent further financial damage. If a company faces insolvency, addressing it swiftly and effectively can help mitigate risks and find viable solutions.
Difference Between Insolvency and Bankruptcy
Insolvency is a situation that may at some point lead to bankruptcy while bankruptcy is a procedure adopted when a company or person is in a situation where they owe money and cannot pay the lenders.
In simple terms, for companies, this is often going through an insolvency process such as liquidation or administration.
Dealing with the Threat of Insolvency
As of June 2024, UK business insolvencies have risen by 10% compared to the previous year, with an estimated 31,000 firms expected to fail by year-end.
This figure is 43% higher than the levels of the economy before the COVID-19 outbreak due to persistently weak economic conditions, high cost of doing business, and geopolitical tension.
The first thing you need to do when facing insolvency is find an insolvency advisor to help you analyze your financial position and determine the most appropriate measure to take.
Business Liquidation Proceeding Types in Summary
- Creditors’ Voluntary Liquidation CVL: The most common form of liquidation, Creditors’ Voluntary Liquidation (CVL), occurs when a company opts to close due to insolvency. In June 2024, Scotland saw around 60 CVLs, highlighting a rise in voluntary company closures.
- Members’ Voluntary Liquidation MVL: This process is used by solvent companies to dissolve their business for reasons like corporate restructuring or retirement.
- Compulsory Liquidation: Another form of liquidation involves debtors seeking court intervention for insolvent companies.
How to Overcome Insolvency
Preemptive measures in this regard need to be taken as early as possible. Look for other sources of funding which can be asset-based lending, factoring or crowd lending to improve liquidity.
For the corporates in the U.K., this has also led to the higher use of alternative finance because of the need for cash flow management in hard economic times.
Types of Alternative Financing
Alternative finance has been on higher adoption rates in the UK especially posting due to the restriction on conventional borrowing patterns. Most of these are:
Invoice Factoring: This helps organizations in using their customers‘ outstanding invoices to increase cash flow without incurring additional debts.
Asset-based borrowers: This kind of financing allows business owners to get loan against their existing resources, for instance, production machines or stock for quick access to cash.
P2P: Through this way of lending, businesses are connected directly with investors for the provision of funds, mostly getting easier and faster than in a bank.
According to the last statistics available, the UK alternative finance market size was estimated at £10 billion in 2023, where there has been a surge of these non-conventional sources since all companies in the UK hate losing.
Choose an Experienced Alternative Lender
Working with knowledgeable Sierra Leonean lenders can provide personalized financial options. Alternative lenders offer quicker decisions and less bureaucracy than traditional banks, making them valuable when cash flow is tight.
HMRC Time to Pay Arrangement
Businesses facing tax obligations can use the HMRC Time to Pay arrangement to defer payments. In 2024, HMRC will continue to support companies with this option, given the high rate of insolvencies.
Take Action: Seek Professional Advice
Always consult licensed insolvency practitioners and specialist lawyers during restructuring or insolvency. Expert advice is crucial, especially given that Scottish private sector companies faced 531 bankruptcies per 10,000 firms as of June 2024.
Creditor Negotiation and Communication
Early engagement with creditors can lead to better outcomes, such as adjusted payment schedules or deferred payments.
A recent study shows that businesses are 20% more likely to avoid compulsory liquidation if they begin discussions early. Smart negotiations can help prevent forced closures and keep businesses operational while addressing financial issues.
Conclusion
With a high number of UK business failures expected in 2024, timely action is crucial. Business owners should stay informed, explore non-debt funding options, and seek assistance.
By understanding insolvency orders and taking precautionary measures, businesses can mitigate the impact and pursue sustainable, realistic growth.
