The last thing any business wants when starting up business is to face insolvency. So, to prevent that from happening to your business, we’re going to provide 5 tips to avoid insolvency as a start-up.
Since the COVID-19 pandemic, many businesses have suffered, and many have thrived. However, we’re still in unpredictable times coming out of the pandemic, and with a war breaking out in Ukraine. It’s not known what is to happen next and, for any business, this can be scary, especially for a start-up making their way into the business world.
There is no doubt that many businesses have suffered insolvency in the last two years; devasting for all involved. Working with insolvency practitioners can prevent businesses from having to close and can also provide helpful advice on how to avoid insolvency in the future.
In 2021, there were a total of 14,048 company insolvencies registered in England and Wales, which is unexpectedly lower than the pre-pandemic levels. So, to learn more about insolvency and how to protect your start up business from going insolvent, keep reading…
What is Insolvency and Why Do Businesses Go Insolvent?
To put it simply, insolvency is when a business’ assets are worth less than the amount of debt and liabilities it has. There are two types of business insolvency, and these are known as cash flow insolvency or balance sheet insolvency.
Businesses going insolvent can happen for various reasons, but there are most usually common elements that cause it, including the following reasons:
- Excessive expenditure
- Excessive borrowing
- Poor business decisions
How Can StartUp Businesses Avoid Insolvency?
1. Invoice Promptly
The last thing you want is multiple people owing you money and having to wait long amounts of time to receive this. If you do this, it’s going to start affecting your own cash flow and how long it takes you to pay your own creditors. The best thing to do is collect money as soon as possible.
2. Negotiate with Creditors
There comes the point where all businesses may find that they’re having to borrow more money and could be struggling to pay back their debts set under the creditor’s terms. When this happens, it can be scary and could possibly lead to insolvency.
The best thing to do in a situation such as this is to directly contact your creditors and see if you can negotiate. You can do this by asking to pay smaller amounts back each month, seeing if you can extend the payment time, or paying off a larger chunk.
Credit.com can provide more advice on how to negotiate with your creditors when it comes to paying off debts.
3. Keep Overheads to a Minimum
Don’t overspend where it is possible to save yourself some money. Overheads can be expensive and be a significant reason as to why a businesses suffer from losses. Take a look at all of your overheads and see where it is potentially possible to save yourself some money.
If you don’t need an extra employee, don’t employ someone. Let’s be real employees – are expensive in general and especially for a start up business. In addition, where you can find stock for a lower price, or other items needed for your business, do so. It might only be a pound or two, but each time this money adds up and will help with your profitability and reduce overheads.
- Know Your Accounts
The worst thing a business can do is not keep a close eye on their accounts, and this includes being aware of cash flow. You need to regularly look at what expenses are going out of the business and what revenue/profit is coming into the business. Doing this means you will be aware of whether the business is performing and where it isn’t.
- Seek Professional Advice
The best thing a business can do from the outset is seek legal or financial advice and assistance. It is a solicitor’s job to provide insightful knowledge into preventing situations such as insolvency. Listening to, and taking on, their advice will save you from hardship in the future.
Follow These Tips to Avoid Your Start Up Going Insolvent
We recognise that no business wants to go insolvent, and we believe there are ways to avoid it where possible. Unfortunately, sometimes businesses don’t work out, and insolvency can’t be avoided. But, if you are following all the tips above, the likeliness of this happening is low.
With this in mind, it’s better to take your chance and follow tips that have worked for other businesses.
How do you protect your business from going insolvent? Leave your tips in the comment box below.
Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained legal and financial professional. Be sure to consult a legal and financial professional if you’re seeking advice regarding your business finances. We are not liable for risks or issues associated with using or acting upon the information on this site.