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Insolvency Guide for SMEs

As a nation of small business owners here in the UK, for many, owning their own business is something they aspire to for many years before actually taking the plunge and going for it.  It’s a great way of gaining more control over both your life and your finances, though, as any small business owner will tell you, it’s not a bed or roses and, in the early years, you’ll often find yourself working harder than you ever imagined while you get your business up and running. 

Running a small business is no easy matter and one of the most difficult issues is maintaining a steady cash flow – this is essential for small businesses to survive, especially in the current economic climate.  A massive 50% of small business fail during the first five years and many small business owners blame this, to a large extent, on cash flow.  In an ideal world you would receive the money due to you for supplying goods or services in a timely fashion.  However, this is not always the case and many small business owners find themselves facing insolvency as a result of late payments owed to them.

Insolvency is what happens when a company’s liabilities exceeds its assets, leading to a debtor being unable to pay creditors.  Small businesses face insolvency for many reasons:

·         A main supplier has ceased trading

·         A major client goes into liquidation

·         The price of raw materials becomes too expensive due to inflation.

·         Changes in regulations threaten the operation of the business.

Those are just some of the many reasons that businesses fail and face insolvency proceedings.  If you’re a small business owner and you’re struggling to meet the demands of your creditors and don’t have any resources available to address the situation, then business insolvency may become a reality for you.  The best way to prepare for this challenge is to make sure you have all the knowledge and understanding to prepare for this and future challenges.

If you’re the director of a limited liability company, then your personal assets will not be at risk when your business is struggling to pay off debts.  However, ignoring the situation while continuing to trade may result in you becoming personally liable for a portion of the money owed.  There are a number of solutions available to you if you’re facing insolvency:

·         Company Voluntary Arrangement – you agree a repayment plan with creditors and a portion of your debt is written off, allowing you to carry on trading.

·         Liquidation – Your Company ceases all trading and assets are sold in order to pay creditors and liquidation expenses.  Remaining assets are divided between the shareholders.

·         Informal Arrangement – You agree a repayment plan with creditors without the involvement of a third party.

·         Administration Order – This insolvency procedure will protect a company from creditors and enable it to continue trading.

If you’re business is facing financial pressures, the sooner you make a decision and put the correct adjustments and measures into place, the more likely it is that the outcome will be successful and you and your business will be able to continue trading.

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