Business insolvency can occur for a variety of reasons, many of which can be unavoidable. No matter what the reason is, successful businesses are those that have contingencies in place for emergencies or sudden changes.

New business owners don’t have the experience to know what they need to plan for, and this leads to a lot of questions. In this post, we’re answering some of the most common questions about business insolvency—read on to find out more.

 1. What are the warning signs?

Insolvency isn’t something you can deal with when it happens; you need to prepare for it beforehand. There are a number of signs you can detect in order to sense insolvency on the horizon.

The major warning sign is missed payments. When your bank, suppliers or creditors start calling to follow up overdue debts, you should start preparing for insolvency, even if you think you’re going to be able to turn things around.
Other types of communication that should be taken into account include letters from the court, the IRD, your landlord or leasing company, and so on.

 2. What can I do to avoid insolvency?

Having a financially healthy business is the best possible way to avoid insolvency. Staying in the black by keeping your assets higher than your liabilities is ideal. However, making sure that you have a firm handle on your spending is the most important step to take. If you have accountants, financial advisors, or business partners, make sure that you meet with all of them to discuss cash flow to avoid problems developing.
It’s also vital to maintain a good relationship with your creditors, because if you do end up in an emergency, they will be able to help you most.

 3. What should I do if my business is failing?

If you’re thinking that you may not be able to overcome the costs of running a business, then beginning the process of insolvency earlier is better than waiting. This is because the earlier you start the process, the more losses your creditors will be able to mitigate. This can help you avoid a worst-case scenario if you act fast enough.
Professional financial advisors provide the best course of action if a business seems to be sinking, as they will be able to advise whether it’s wise to seek new lines of credit to fund the business, or better to commit to insolvency early.

 4. How does insolvency start?

Most commonly, your creditors are the ones who can begin the insolvency process. If you owe any of your creditors over a specific threshold, they can send you a statutory demand to pay. If you don’t pay for 21 days, they can move on to the court, and apply for compulsory insolvency, in which the court will shut down your business.
The other way insolvency begins is by volition. If you don’t think your business can possibly pay off its debts, then you can go into voluntary liquidation.

 5. What happens to my business after that?

Businesses that either elect to go into voluntary liquidation or which are made insolvent by the court stop trading. Their assets are collected and sold off in order to pay off as much of the debts as possible—this is what liquidation refers to; the distribution to creditors. It is conducted by a specialist liquidator.
This liquidator gains control of everything that the business’ previous director or owner had control over, and they keep this executive control until all the assets are sold off, and the business no longer exists.

 What next?

Can you save a business after insolvency? It’s possible, but it can be tough to do alone. Call on the professional business recovery and insolvency team at BDO for efficient and effective advice, whatever the location and whatever the industry.