A company is considered insolvent when it is unable to pay its debts as and when they fall due and payable. Insolvency generally signals the end of a company’s life. By the point of insolvency, it is often too late, but if you keep a close eye on some early warning signs you might be able to prevent your company from going under.
The first and most obvious sign of insolvency is late payments on existing debts. If your company is regularly struggling to pay its current debts on time, this should be considered a serious warning sign of current or upcoming insolvency. If you notice that you are starting to make late payments on numerous debts it may be time to consider a restructure or insolvency plan to address the issues you are facing.
The second sign of insolvency is low cash reserves. Your company may not yet be making late payments on debts, but if your cash reserves are low it may only be a matter of time before debts start stacking up. Another reason that low cash reserves may be an indicator of insolvency risk is that it means the company is generally unable to access capital to use for profitable ventures. If your company does not have much money left over after debt repayments you can be prevented from taking various opportunities, preventing you from ever getting back on your feet. It is essential to keep an eye on your available cash reserves so that you can quickly address this issue if it presents itself.
Finally, insolvency may be signalled by an inability to access finance from lending institutions, whether banks or other. Lending institutions do rigorous analysis to determine whether lending money to your company is worth the risk. If you’re finding that multiple lending institutions are determining that you are too risky to provide finance to, you may need to conduct your own assessment of your business to determine the cause of the risk and create a solution.
These three insolvency risk factors are by no means guaranteed signs of upcoming insolvency, but it is important to keep a close eye on your company if any of these signs present themselves. If you’re experiencing any of these indicators in your company it might be time to reach out and contact one of our experienced restructuring and turnaround specialists here at Frank Law on (02) 9688 6023.
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This is not legal advice.