The uphill struggle facing small businesses due to the latest challenges from the cost of living crisis is well documented in the press.

So, when is a business considered to be insolvent?

A business is considered to be insolvent when it is unable to pay its debts and when they fall due.

This means that the cash held by the business is not enough to pay it’s bills – be that suppliers, employees and HMRC.

This may be a temporary issue if the business is owed a large amount by customers and when this lands, they can pay everyone and be up to date again – in this instance, communication with suppliers etc is key so that they know there will be a delay in their payment and agree when it will be paid.

But it may be a larger issue and if the business is facing ongoing issues and cannot make the payments, then it would be insolvent., If a director knowingly trades whilst insolvent and builds up more debt, then they could potentially be held liable for these debts – this is clearly not a position that they would want to be in and so it’s time to talk to a restructuring and insolvency professional who can look at the business and determine the best way forward. And options may include:

• Sale of the business
• Appointment of an administrator to sell stock and assets to generate cash to pay suppliers

It should be noted, that not all suppliers will be paid in full – there will be preferential creditors who get paid first (ie the administrator needs to be paid to do the work) and other creditors may only get a certain percentage of what they are owed.

This can be a very scary time for businesses and if you are struggling please reach out and talk to your accountant about it – we are here to help if we can, and can point you in the right direction if we can’t.

And remember – just because a business doesn’t succeed, it doesn’t mean that you haven’t or that your idea wasn’t a good one or that you didn’t work hard enough – you’ve done all those things, but sometimes external factors just cannot be overcome.