Insolvency is the scenario when your business does not have enough money to pay the debts that are due. In other words, there isn’t enough cash for meeting the current liabilities that you may have, like money that is owed to your suppliers. However, when your business is in insolvency, you can do several different things to resolve insolvency. Some of them are as below.
Own your problem
Many entrepreneurs usually act optimistically when facing real problems and they find it difficult to accept defeat. When your business starts sinking, it’s really important that you recognize it prior to having an opportunity to save it.
Don’t worsen up your situation: You must avoid measures which would make the problem even worse – for instance, financing inventory using credit card or through factor. Credit cards won’t just expose you to higher interest rates but they’ll leave business owner, rather than the company, to be responsible for debt. An even dangerous thing would be to skip taxes for meeting your short-term obligations.
Don’t use your savings: Your personal savings, particularly the retirement funds, should not be used for meeting your obligations. When you’ll have a chance of reorganizing, this money would be needed for recapitalizing.
Prioritize the debts
When you have to file bankruptcy, it will be determined by the court that how much the creditors will get. Till that time comes, you have to strategically decide who you’ll be paying and when you’ll be doing so.
Secured creditors should be paid first: The vendors will probably be demanding their payment more aggressively than the bank; however, you should not try satisfying loudest voice in the beginning. It is likely for the bank loan to be secured by certain assets. So, your destiny will be in the hands of the bankers rather than the suppliers.
No favorites: It is better that all the unsecured creditors are paid something rather than concentrating on few of them. In case of formal bankruptcy, appointed administrator can sue for recovering and redistributing preferential payments and eat up cash which could have satisfied your debts.
As for entrepreneurs, reorganization would be the best result as the business is still being operated by them. Mostly, it means to negotiate with creditors for either lowering principal owed or stretching the payments for lowering monthly bill. Typically, the negotiations involve convincing the lenders it’s the time to lessen your burden, otherwise they’ll likely be getting much less back later on.