Insolvency risk is also known as Bankruptcy risk. It is defined as the risk where a firm or a person’s liabilities exceeded his or her assets is unable to meet and satisfy debts and financial obligations. Now if you have a small business or property that you have invested by lending from a company or an entity, it is your obligation to raise money in order to pay for your debts in due time. It is a concern to be put in such situation, luckily there are ways for you or your business to minimise the risk of insolvency by taking smart steps to solve any problems that could arise from it. Bankruptcy threats are always there however a strategic and active approaches that will help you a lot in avoiding financial or business failures.
Your personal assets may be at stake if your business is to fail. Your liabilities may exceed your liquid assets when times get tough or personal insolvency hits you. There is a correlation between business insolvency and personal insolvency. You can help protect your personal assets through incorporating as a limited liability company or a limited liability partnership, as long as your personal guarantee must not cover your business debts.
Through giving your business a secured loan instead of buying shares when you try to put up the money into a business, then it helps you to invest in less risky way. The con however is that you are not able to borrow from other lenders since the kind of protection limits you to do so.
Another significant way to minimise insolvency risk is through cash flow forecasting and credit control. The method of credit control will help you enhance the balance sheet which in return, reducing chances of insolvency of your business. Meanwhile, cash flow forecasting is also vital and should is regularly updated to keep track and give you an early warning system of any inevitable shortage in cash flow.