Since time immemorial, business experts believe that any form of debt is the nasty match that lights the fire of every crisis. Having said so, the incapability of meeting financial obligations is perhaps every individual’s and business’ most unpleasant experience. However, there is a silver lining to every problem, and the state of insolvency too can be smartly handled.
Let’s dig deep into the concept of “insolvency”.
Insolvency is the state wherein a company or individual is unable to pay the debts when they are due. The inability to meet financial obligations to lenders causes a state of financial distress.
Insolvency can be expressed as the financial condition in which the sum of an entity’s debts is greater than its entire property/assets, at a fair valuation. However, it should be noted that insolvency only becomes a problem when a creditor pursues to collect the amount, and the debtor is unable to pay his/ her dues.
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One can contemplate insolvency as the ultimate trigger for financial hardship. If insolvency were a medical problem, doctors might call it an acute condition- as financial trouble is indeed chronic.
Insolvency can arise from a number of reasons. These reasons are triggering factors that make a person or a company “insolvent”. Some of these are discussed below-
In this situation, consumers might choose to take their business somewhere else, so that they pay less for a product or service. In a chain reaction, losing clients may result in losing income- and the inability to pay back to creditors only increases, inviting insolvency.
Other reasons include:
Insolvency comes in two flavours- cash-flow insolvency and balance-sheet insolvency. Let us understand what they denote-
Insolvency is not the same as bankruptcy. Insolvency is a condition, whereas bankruptcy is a legal process.
Breaking this down further, insolvency is a state of economic distress. Bankruptcy, on the other hand, is a legit court order that decides how an insolvent debtor will deal with unpaid obligations.
Besides bankruptcy, the concept of liquidation is an integral subject that should be acknowledged as we discuss insolvency. Liquidation involves shutting down the business and selling the assets to pay all the stakeholders.
Insolvency is a financial state of affairs and does not necessarily indicate that the company may end up in liquidation. However, it should be regarded as the crunch point wherein strong decisions need to be made to pay the claimants.
Sound steps to clear debts and restructure of the company may avoid liquidation altogether.
Fortunately, there are solutions for resolving insolvency.
Once a company realizes its insolvency, its ultimate aim should be to prevent further depreciation of assets and depletion of cash. Following are a few guidelines that can help business deal with this crisis -
Below are a few tips that can help businesses prevent the financial massacre of insolvency.
REMEMBER THIS- Being insolvent does not necessarily indicate the end of a company. There are options for debt relief, company’s rescue and turnaround.