Insolvency is a situation that occurs when a company or individual can’t pay their debts or creditors in full when they are due. A company can be classed as insolvent when its debts outweigh its assets, though this doesn’t necessarily mean the business cannot recover. Insolvency is also different to bankruptcy.
Before the state of insolvency is made formal, there is often a period of informal arrangements with creditors to try and find a way for the debts to paid without the business folding.
The risk of insolvency can arise for many different reasons, including a loss of cashflow from poor sales or other factors, an increase in costs from production or materials, or poor financial management.
Key takeaways from this section:
- Insolvency occurs when a company or person is unable to pay off debts that are due.
- It’s a state of financial distress that can be resolved by making arrangements with creditors to pay off debts and doesn’t always lead to bankruptcy.
- Insolvency can happen due to many reasons, such as external factors that reduce cashflow, or poor financial management.
Entering a state of insolvency is about being unable to pay off debts that are due, whether that’s as a business or an individual. This can progress to insolvency proceedings, which is a legal process taken against the insolvent person or company wherein assets such as property or stock may be liquidated in order to pay off the debts.
This is usually a last resort however, as creditors will try to come to an arrangement to restructure debts to make them manageable for the insolvent company or person. Naturally their priority is to recover their money, and usually this is more likely if the business can keep operating rather than collapsing.
The company can come up with a plan to restructure the debt and repay it over a longer period in smaller instalments, while making internal changes to reduce costs or boost sales to continue profitable operations.
Insolvency vs bankruptcy
At first glance, insolvency may sound the same as bankruptcy, but they are different states of financial distress with different implications.
Insolvency occurs when a business’s liabilities outweigh its assets, but it’s a temporary state that can be escaped through careful management and arrangements with creditors. Bankruptcy is a more advanced stage of insolvency when a court order is issued and a plan put in place to pay the debts.
The causes of insolvency
There are many reasons why a business or a person could fall into insolvency, both from external factors and internal management practices. The rising cost of suppliers or raw materials can contribute to a business’s insolvency, as well as a loss of customers due to increased prices or stronger competition.
A business could also be the target of a lawsuit from a customer or supplier, which could result in large legal bills and damages, or even a ceasing of operations.
Internal factors could include poor financial management such as incorrect budget reporting that leads to an overspend, or a lack of control on company expenses.
What happens when you go into insolvency?
Insolvency is a state of financial distress where a business or person cannot afford to pay their debts that are owed. While it can lead to bankruptcy, insolvency itself may only be a temporary state from which its possible to escape by restructuring repayments and making agreements with creditors to clear the debts.
What is personal insolvency?
In the UK, personal insolvency is when an individual is unable to pay their debts when they come due. Bankruptcy is a type of insolvency that involves a court ordered plan to repay the debts, but a person can be insolvent without being declared bankrupt, and can make agreements with creditors to restructure the debts so they can be repaid.
Have you thought about Invoice Finance as a cash flow solution for your business?
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
The benefits of invoice finance companies such as Novuna Business cash flow
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Competent staff, slick technology. Would recommend
Halo is one of the smartest bits of tech I have seen & every team is only as good a it's people and I would like to take this time to actually specifically point out Alex Hall & Claire Davies. Alex is an account manager that has continually improved during our time working together and is a real credit to Novuna. Claire has been exceptional from start to finish; meticulous in her work and very patient with us at every temp - an absolute star. It is a shame that the email address went to a generic platform and not each individual. I totally understand why this works better for companies but it did mean that the personal element was lost meaning that starts like Claire will be harder to identify from a customer point of view.
High recommedation for Novuna Business Cashflow.
My company was in need of invoice factoring to assist with the cashflow due to the nature of debtor days with our clients. After looking at a number of options, the right decision was made to work in partnership with Novuna Business Cashflow. Right from setup through sales to customer service, the communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll. This has allowed my company to look at positive growth knowing we are safe financial hands. I would highly recommend Novuna Business Cashflow 10/10.
Set up went well and communication was good.
Syed and Vipul were extremely helpful top class service
Very helpful from the start
Great people made this process very straightforward.
Jemma from Novuna (formally Hitachi) was brilliant. Worked with us throughout the process and succeeded when some others had failed. Carried out the necessary checks with a smile and cheery demeanour, making what would have been a laborious process quite manageable.
Teething problems -Maybe ?
It's still early days so I may alter this review at a later date. However with retentions and concentration limits and other items, were finding were not getting 85% up front, were probably getting nearer 70% Also when a customer pays the remaining allegedly 15% due to us seems not to be credited to become available. For instance a customer paid Â£6918 and a customer paid Â£1300 hence we should see an extra Â£1330 available (15% of both these payments). However availability seemed to go down and not up by Â£1330 !!! Hard to work out where this 15% has actually gone ? I'll re-submit this review when things become clearer.
I found Hitachi true to their world in every aspect of the service they promised. I can't recommend enough.
Excellent Customer care and service.
Excellent customer service from start of initial conversations, right through to finally becoming a customer. The whole team involved are a credit to Hitachi, they were accommodating and informative the whole way along the process. I would highly recommend Hitachi to future clients and business associates. Thanks Alan.
I really enjoyed working with the Hitachi team, professional, helpful and really good people to deal with. They have made what could have been a very difficult experience a pleasure. Very happy to recommend them.
Hitachi made the process of moving factoring facilities painless, bearing in mind we previously had our facility with the same provider since 1997. I cant fault Hitachi's staff and processes and we are delighted with the move.
Staff excellent all together professional
Great service so far
From start to finish the process for transferring our invoice finance to Hitachi has been been brilliant, a smooth transition, great communication our link Person Jonathan Oakes has helped the process go through seamlessly, A great experience so far and a brilliant start to what we hope will be a long term partnership.