Whats Your Digitaliq Blog How to Define Insolvency in Business

How to Define Insolvency in Business

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Define insolvency in business is the state of being unable to pay your debts. This can be a complex and stressful situation and it is important to seek help from an experienced insolvency practitioner as soon as possible. This could include working towards refinancing, restructure your debt, guide you through the liquidation process or assisting with a company voluntary arrangement (CVA).

There are two main types of insolvency; balance sheet and cash flow. A company is considered insolvent under the balance sheet test when its liabilities exceed the value of its assets. In contrast, a company is classified as insolvent under the cash flow test when it cannot meet its operational and debt repayments as they fall due.

Defining Insolvency in Business: A Practical Guide for UK Entrepreneurs

An individual can also become insolvent, whether it be through a bad financial decision or unfortunate circumstances. For example, an expensive divorce, a redundancy or illness can drastically change someone’s financial situation causing them to fall behind on their debt payments. This may require them to enter an insolvency process such as bankruptcy.

Many businesses fall into insolvency through poor management of their finances. For instance, over-investing in equipment that can’t be quickly sold contributes to a cash shortfall. Similarly, if a company does not keep up with the demands of consumers by offering a more varied selection, they can lose profits and potentially face insolvency. Luckily, there are a number of options that an insolvent business can take to restructure their debts and improve their financial position.

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