EconGuru Economics Guide RSS Syndication

Submit a Guest Post on!

© Copyright 2006 - 2011 All rights reserved. Assets marked and linked to the original sources are hereby used for educational purposes only and are copyrighted by their respective owners.

Subscribe to EconGuru.

What is Insolvency?

Subscribe to EconGuru:

If a company or individual is in a situation where they can no longer pay their bills it is referred to as insolvency. This is a precarious situation for any business to be in and if cash cannot be generated quickly to cover debts it can lead to bankruptcy. The main reason why this situation occurs is because debts and liabilities are more than cash flow or available liquid assets. It could be that the company has a lot more assets then debts but if this can’t be turned into cash quickly it could still spend the end for the business.

The Difference Between Insolvency and Bankruptcy

It is common for people to confuse insolvency with bankruptcy, but these are two different things. This is because it is possible for a company to be insolvent without them becoming bankrupt. It is true to say that insolvency often leads to bankruptcy, but this isn’t always the case. If a company is able to increase their cash flow it will allow them to escape the current crisis. In other words, bankruptcy is final but insolvency might just be a temporary situation. Another important difference is that going bankrupt is a legal matter.

How Companies Can Deal with Insolvency

In a lot of cases a business will be able to pull back from the brink and sort out their insolvency problems. This can be done by selling off assets, borrowing money, or increasing their line of credit. Some companies will come out of this situation a lot better off than before their problems began. This type of event forces them to reevaluate the company so that they can cut the deadwood. By selling off those assets in the company that are not effective at producing profit the business might be a lot leaner and effective in the future. For instance, a business may decide to sell some of their unneeded office space, or if it they have a chain of stores they could sell off those that are not making a good profit.

Sometimes a business may decide that they are unable to escape their problems alone. In this situation they may see acquisition by a larger company as being the best solution. Such a move can give a much needed cash injection to the business and save it from ruin. The owners of the business may find the sacrifice of giving up their business a bit hard to swallow, but at least it leaves the company intact. Some large businesses are devoted to buying up struggling companies and turning them around.

Some Final Thoughts on Insolvency

When a business becomes insolvent it doesn’t have to mean that they will need to declare bankruptcy. It is a dangerous situation to be in but if the company is able to handle things correctly it could mean that they will later be stronger than ever. Making it in the business world is often a huge struggle and most owners will suffer periods of time where staying afloat feels like a real struggle.

Share This Article:
Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.


Tags: , , ,

EconGuru Economics Guide

Educating the public since 2006.

As an Amazon Associate, EconGuru earns from qualifying purchases.