We explain how to reduce your company’s risk of insolvency, the personal risks you could face as a director, and the warning signs to look out for.

You can minimise your exposure to risk via practical business management strategies and decisive action when tough decisions are called for.

What is Insolvency Risk?

From an accounting perspective, a company is insolvent when it can:

(a) not pay its bills when they fall due

(b) when liabilities exceed assets

In practical terms, any business needs enough cash flow to meet its obligations. So the closer you are to not being able to do this, the higher your insolvency risks.

The legal tests for insolvency are in guideline form. Sometimes, it can be difficult to be sure whether, in legal terms; your company is insolvent. If it may be insolvent, you should seek professional advice. This is because if you continue to trade after your business is insolvent, you also face insolvency-related risks of personal liability as a director.

Reducing your Company’s Risk of Becoming Insolvent

To protect your business (and potentially your own risks as director – see here), there are several steps you should take:

• Credit check your customers – Checking the credit references of prospective trade debtors is an absolute must, mainly if they operate in an industry with a high failure rate. The highest failure rates are shown on page 10 of this official Insolvency Service release.

• Regularly review credit limits – Companies regularly extend their credit terms to secure new business and develop a good relationship with customers, but you should always keep a close eye on your credit limits.

• Implement credit control procedures – You should have a clear and effective credit control procedure. This will help you identify your exposure at an early stage and act accordingly.

• Retention of title clauses – If you supply goods, incorporate retention of title clauses in the terms of your customer contracts. This allows you to seek recovery of your products in the event of non-payment.

• Explore credit insurance and invoice financing – A credit insurance policy will pay out and protect your business against a customer’s failure to pay. Alternatively, you might consider an invoice financing agreement, such as non-recourse factoring, which pays you a proportion of the value of an invoice upfront. This can help to protect your business from the impact of an insolvent customer.

expert help is at hand

Our mission is to help directors find the best possible solutions to business debt. Please call our UK Directors Helpline on 0800 074 6757 for the free advice and immediate expert assistance. Or just click into the live chat during working hours.