It’s important to look at your business objectively. In many instances it’s hard to remove emotional attachment – put simply, think about your business as if it is someone else’s.
There are two common tests for insolvency, the first being ‘cash flow test’ which is when a business is unable to pay its debts as and when they fall due, regardless of assets. The second is the ‘balance sheet test’ which is when a business’s liabilities exceed its assets, regardless of when debts fall due.
It is openly debated that these two tests aren’t complete and distinct; one is a short-term view of debt, and the other a long-term view on assets. When applying these test legally speaking, a large number of SMEs could have technically traded whilst insolvent.
Before this happens however, there are patterns which can be identified, some of which include; not being able to pay creditors on time or in full; if creditors have issued final demands for payment or a statutory demand; creditors have commenced legal action on the company.
If your business has received a final demand or a statutory demand, this could soon escalate into the creditor commencing legal action and a Winding Up Petition being granted. That’s why it’s important to contact your Bolton business advisors as soon as you receive a final demand before it escalates into legal action.
If as a business you’re struggling to pay creditors on time or in full, you may be able to renegotiate terms.
If you spot any of these triggers, it may mean your business is heading towards insolvency. In some cases it may indicate a business requires a funding injection.
If you think your company could be heading towards financial difficulty, please contact our Bolton business advisors so we can assist you before it’s too late.
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