If your business is experiencing financial difficulties, you need to understand the corporate insolvency services available to you.
In this article, we’ll tell you how to identify the signs a company is in financial trouble and what options are available to businesses in this situation.
We’ll provide an overview of corporate insolvency services and how they can benefit you and your business.
How Does a Business Become Insolvent?
Businesses all over the world have been feeling the impact of an economic slowdown as a result of recent events. The coronavirus crisis and consequent lockdowns, closed international borders and the war in Ukraine have caused many companies to experience financial difficulties.
The ongoing labour shortages and global supply issues mean businesses are suffering from cash flow problems and reduced income resulting in financial problems.
It’s vital now more than ever you seek professional advice when you spot the warning signs indicating financial issues to give your company the best chance of a return to successful trading.
The Red Flags Warning of Financial Problems for Your Business
1. Missed payments to the Australian Tax Office (ATO)
When a business doesn’t pay its tax liabilities, it can face serious consequences. The ATO can apply penalties and interest on the unpaid amount, which will increase the total debt. In some cases, the ATO may take enforcement action such as issuing a director penalty notice, making directors personally liable for the unpaid debts of their company.
If you are experiencing cash flow problems and haven’t been able to pay your tax liabilities, it is important to get financial advice as soon as possible. Your advisors may be able to help you restructure your business, enabling you to start repaying your debt to the ATO.
2. Ongoing losses
If you’re continuing to lose money after two years, then it’s time for a financial review. Your financial advisors might identify inefficient business processes which aren’t adding value and should be stopped or improved upon. You may be able to sell idle or non-performing assets and reduce overhead costs in order to stop losing money.
3. You are receiving demands for payment
The creditors have taken legal action and issued final demands for payment. You are on the path to serious financial problems as a company.
4. Financial dependence on others
If your business is struggling, you may be borrowing money from friends and family. This can be risky as if the company goes into liquidation the friends and family who lent you funds will be ranked equally with all other unsecured creditors with no guarantee of ever receiving full repayment of their loans.
5. Stock isn’t moving
If your stock isn’t selling, this will cause cash flow problems for your business. Old or even obsolete stock can affect the value of a company’s assets and make it difficult for you to pay off debts and finance new projects with debt financing or sell shares on the market at reasonable prices.
6. Sales are down
When a business is experiencing decreased revenue, it may be because it needs to inject cash and conduct marketing or perhaps diversify its offerings. A professional financial expert can review your company’s place in the market and help identify strengths/weaknesses for you as well as opportunities and threats you may not recognise.
7. Unpaid invoices
Collecting debts can be difficult, but it’s crucial if you want to run your business smoothly. A financial advisor might recommend contacting the customer directly or taking other steps like discounted invoices to encourage payment.
8. Unable to obtain funding
Have you had your application for new or an extension to existing credit rejected? If so, you may consider alternative methods of freeing up cash. A financial advisor may review and possibly renegotiate debt repayment terms enabling your business to continue trading.
What Corporate Insolvency Services Are Available to an Australian Business in Financial Trouble
There are a number of corporate insolvency services available to businesses in Australia. Each option has different benefits and drawbacks, you must seek professional advice before deciding which one is right for your business. The most common outcome, or service, for a company with financial difficulties, includes the following:
Voluntary Administration involves appointing an administrator to take control of the company. This can help to restructure the business and develop a plan to repay outstanding debts.
If a company cannot pay its debts, it may go into liquidation. A liquidator has the duty to act on behalf of your creditors.
A registered liquidator is appointed to manage the company, investigate what caused the business failure and identify and sell company assets to pay the costs of the liquidation and settle outstanding company debt. The process includes meetings with creditors and directors, the sale of assets and finally, the delivery of a report to ASIC before the business is wound up.
Receivership occurs when a company is unable to meet its financial obligations and is placed under the control of a receiver. The receiver will then manage the company’s affairs and sell assets to repay the outstanding debt to the secured creditor.
The receivership is over when the receiver has sold off enough assets to fully repay the secured creditor. At this point, any remaining assets and control of the company are passed back to the directors.
Businesses restructuring and turnaround
Your businesses may start out with a small loan or overdraft. This might grow over time as the business grows and takes on more debt to fund expansion and growth or to continue trading.
Restructuring is the process of reviewing a business’s current capital structure and making adjustments if necessary. This may involve sourcing funds or renegotiating the terms of existing finance.
A turnaround involves the development of a strategic plan to ensure the future of the business. First, the decline in financial performance is halted and the improved company structure is put in place. The turnaround phase introduces the plan to improve the company’s efficiency and profitability.
The process can involve substantial change, such as stopping the delivery of certain services or products, developing new markets or even selling assets and making certain employees redundant.
The benefits of corporate insolvency for both the company and its creditors
When a company is insolvent, or at risk of insolvency, corporate insolvency services can help to protect the business and its creditors. There are a range of benefits for both the company and its creditors when a business enters into corporate insolvency.
For the company, corporate insolvency can provide
Protection from creditor action
When a company is insolvent, corporate insolvency services can help to protect the business from creditor action. This can include actions such as legal proceedings or the seizure of assets. Corporate insolvency can provide a company with time to restructure its business and negotiate with its creditors and come up with a plan to repay its debts. This is beneficial for both the company and its creditors.
A chance to avoid liquidation
When a company is insolvent, it might be at risk of liquidation. Liquidation is the process of selling off the company’s assets to repay its debts. This can be a difficult process for creditors, including employees of the company, as they might not get all of their money back.
Corporate insolvency services may investigate your financial affairs and suggest options and solutions which means you can continue to trade successfully.
For creditors, corporate insolvency can provide
The opportunity to recover some of their money
If you are a creditor owed money by a company at risk of becoming insolvent, corporate insolvency services can provide you with the opportunity to recover some of your money.
If the company goes straight into liquidation, there is a chance creditors, including employees of the business, may receive no repayment of their outstanding debt.
A professional, experienced insolvency advisory service will investigate the financial performance of the company and may identify solutions enabling the company to return to profitable trading and to settle all, or most, outstanding debts.
A Corporate Lifeline for Your Business!
At Corporate Lifeline, we understand you may be great at running your business but you may not understand the financial structure of a successful company.
We have financial, business and systems expertise and can help you investigate your current financial situation and turn your business around.
We specialise in helping companies recover from financial problems. We offer credit repair services, financial counselling and more to help your business succeed. Contact our team of financial experts if you’ve noticed any of the warning signs below. We can help you recover from your current situation as soon as possible