Avoiding bankruptcy and winding up
To keep your business solvent you should bear the following in mind:
- Do not allow your debts to exceed your assets.
- Keep an eye on your cashflow. See our guide on cashflow management: the basics.
- Choose the right business structure. See our guide on legal structures: the basics.
- Implement good credit-control structures.
- Take care before offering personal guarantees for business loans.
If your assets - eg stock, buildings, machinery or debts owed to you - equal the amount of loans and debts that you owe then you are in a situation where all of your capital could be wiped out.
Your creditors effectively own your business and if the value of the assets falls further your creditors could realise that their money is at risk and want it back. This would make you insolvent, as you wouldn't be able to pay them all.
To avoid this you need to make sure that your capital is maintained. You should try to keep your own capital up by holding back profits where possible. Do not be tempted to take on loans that would increase your borrowing far above your own investment in the business.
Even though you are making profits and have enough capital you can still become insolvent if you cannot make payments on time. You need to make sure you have a good cashflow so that you can pay debts on time.
A common problem is to take on too much debt while chasing new business. This is known as overtrading. Careful planning and forecasting will help you to avoid this. See our guide on how to avoid the problems of overtrading.
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