Survive and Thrive: How to Rescue Your Business from Insolvency and Grow

Kyle Wilson

Last Modified : Mar 12, 2024

Despite last year’s surprising GDP growth, business bankruptcies surged over 30% due to diminished margins, a tight credit market, intense competition, and labor disputes. As we progress through the first quarter of 2024, while media headlines highlight the resilience of the US economy, many businesses are preparing for continued economic uncertainty.

In this climate, all businesses, especially those facing insolvency, should prepare for another round of economic constraint in 2024 until more favorable conditions emerge.

Attaining financial stability is paramount for survival, and the journey to thriving entails harnessing a positive and dependable cash flow. Continue reading to discover strategies for overcoming insolvency as small and medium-sized businesses (SMBs) strive to regain equilibrium in a challenging economy.

What is insolvency?

Insolvency is the inability to make debt payments on time, marking the first step toward bankruptcy. There are two types of insolvency:

• Cash-flow insolvency: This occurs when a company lacks sufficient liquid assets to meet its short-term financial obligations, even though it may have valuable long-term assets. Rectifying cash flow insolvency involves implementing strategies to expedite cash flow and unlock capital tied up in current assets.
• Accounting insolvency: In this scenario, a company’s total liabilities exceed its total assets, indicating an inability to meet financial obligations. Companies facing such complexities are advised to seek assistance from reputable insolvency professionals who can assist in navigating the resulting financial distress effectively.

How to overcome insolvency

When faced with insolvency, immediate and decisive action is critical to mitigate the risk of business closure. Successfully addressing insolvency requires a planned strategic response.

Here are the recommended steps to follow:

Step 1: Assess your company’s financial situation. Ensure your accounting records are up to date. You’ll need an accurate income statement, balance sheet, and statement of cash flows to evaluate your business’s financial health correctly.

Step 2: Identify the causes of insolvency. Analyze your financial statements to determine the cause of insolvency. Here are some possible scenarios to consider:

• Did your revenue decrease? What led to the decline?
• Did the company’s total number of customers reduce? What factors contributed to this decrease?
• Did the customer base remain constant, but revenue per order decreased? What caused the decline in average order value?
• Did operational expenses, overhead costs, or debt payments escalate?

Time is of the essence! Once you’ve identified the cause(s), immediately move on to the following steps to address the issue at its core.

Step 3: Cut discretionary costs. Cutting discretionary costs is the first and most expedient method to halt excessive cash outflow. Review your income statement for non-essential expenses. Any costs that do not contribute to a positive bottom line should be eliminated.

Step 4: Seek professional advice. Navigating insolvency can be treacherous. To avoid bankruptcy and gain traction, seek professional guidance to develop and execute a turnaround plan tailored to your company’s needs. Insolvency and bankruptcy lawyers, accountants, and other financial professionals can provide appropriate advice.

Step 5: Develop and execute a turnaround plan. Developing a business turnaround plan requires evaluating financial health, operational efficiency, and market positioning. This assessment forms the basis for implementing strategies to reduce costs, optimize revenue, and enhance efficiency. Successful execution relies on strong leadership, and a commitment to restructuring with innovation and agility to ensure business revitalization.

Step 6: Negotiate with creditors. Be upfront about your situation and share your turnaround plans with creditors. This approach can instill confidence in creditors that they will eventually receive payment if they’re willing to restructure the debt they’re servicing. Creditors have an incentive to cooperate and negotiate with you if your business presents a viable turnaround plan.

Step 7: Explore alternative financing options. Executing a turnaround plan requires financial backing. Given that traditional banks are typically averse to financing businesses in insolvency, another funding source must be found. Now is an opportune time to explore alternative financing options to secure the necessary backing for your turnaround efforts.

Alternative financing: A crucial resource
Alternative financing can serve as a lifeline for companies facing insolvency, offering access to capital when traditional lenders may be reluctant to extend credit. These alternative sources typically provide features and benefits that are crucial for supporting companies navigating challenging financial circumstances.

Fast and easy qualification. Businesses with creditworthy customers, tangible assets, and a viable business plan are favorably positioned to meet the eligibility criteria for alternative financing. The underwriting and approval process are streamlined, often taking only a few days compared to the prolonged timeline associated with traditional financing.

Quick access to capital. Once approved, onboarding and initial funding can occur swiftly. Depending on the selected funding option, funds can be transferred within hours of each subsequent request. Fast access to capital can significantly impact the ability to keep your operations running smoothly.

Flexibility in repayment terms. Conventional banks typically impose strict repayment terms without room for negotiation – a possible contributing factor to insolvency for businesses relying on conventional financing. Alternative financing offers more flexibility in repayment terms, allowing businesses to accommodate cash fluctuations better and navigate financial challenges effectively.

Types of alternative financing

Leading alternative lenders provide a range of financing options tailored to support turnaround strategies and fuel growth for businesses on the road to recovery.  Access to a well-rounded credit mix allows a business to optimize its financial structure, effectively manage risks, and ultimately improve its overall creditworthiness. Among the most effective solutions to quickly stabilize financial structures are asset-based lending and accounts receivable financing.

Asset-based lending offers a flexible revolving line of credit secured by your company’s assets, such as accounts receivable, inventory, and equipment. This financing option allows your business to leverage its assets to maximize borrowing capacity, with credit limits scaling as your assets grow. Further benefits include minimal loan covenants, allowing companies to allocate funds as needed without lender interference.

Accounts receivable financing, also known as invoice financing, presents a valuable opportunity for businesses to address immediate working capital needs. Through this financial option, your company sells its outstanding invoices to a third-party lender at a discounted rate. Within just 24 hours of submitting invoices for financing, your business can receive an advance of up to 95% of the invoice value minus the discount rate. The lender then manages the collections process, ensuring efficient and timely payments. The remaining balance is transferred upon full payment of the invoice. This financing solution provides immediate access to capital and avoids the burden of incurring debt, making it an ideal solution for businesses looking to restore cash flow efficiency and regain financial stability.

Choose an experienced alternative lender

In times of financial distress, swift and effective action can often be the key to resolving insolvency issues. While survival relies on implementing a recovery strategy to address short-term obligations, it is equally important to consider long-term growth objectives to ensure the company’s sustained success.

Experienced alternative lenders, well-versed in aiding undercapitalized businesses across diverse industries, offer valuable insights and robust financing solutions tailored to your specific needs. With their well-established network of support services, these lenders serve as trusted partners, guiding and supporting your company through the challenges of insolvency and supporting growth initiatives.

When choosing an alternative lender to partner with, prioritize industry market leaders. These lenders have a proven track record, offer creative financing solutions, and unparalleled expertise to help steer your business back to financial stability and sustainable growth.

Conclusion

Due to ongoing economic uncertainty, businesses are advised to prepare for continued challenges. Surviving and thriving amid the financial challenges of a low-growth and uncertain economy requires organizational efficiencies and financial stability. For companies facing insolvency, they must act quickly and decisively to recover before shifting focus to growth objectives.

Addressing insolvency requires a planned strategic approach. Start by ensuring the accuracy of your accounting records, then follow through with a comprehensive audit to identify the root causes of insolvency. Immediately cut discretionary costs before seeking professional help to develop and execute a turnaround plan. The plan should include negotiations with creditors to restructure accounts payable and partnering with experienced alternative lenders to finance the recovery.

Insolvency can often be resolved with swift and decisive action, especially if the business is agile, adaptable and follows the advice of experienced professionals. Leading alternative lenders can prove to be invaluable as partners in efforts to recover from insolvency, establish financial stability, and grow the business through challenging economic conditions.

Key Takeaways

• Learn how to survive insolvency and thrive as your business regains financial stability in a low-growth and uncertain economy.
• Follow recommended steps to tackle insolvency with a planned strategic response.
• Discover the importance of alternative financing in supporting a turnaround strategy and support growth on the other side of recovery.

Kyle Wilson

SVP, Sales Director of Business Development for eCapital’s Commercial Finance Division

Kyle Wilson, CPA, CMA is the Senior Vice President, Sales Director of Business Development for the Commercial Finance Division at eCapital. Kyle is responsible for leading business development efforts throughout North America, supporting eCapital’s mission to empower companies by accelerating their access to capital. Kyle ensures the company’s highly skilled team of business development professionals are well-positioned to support market needs.

Kyle has more than 13 years of expertise in commercial financing. Kyle joined eCapital from Hitachi Capital Canada, where he held the position of Director, Business Development. Prior to that, he held business development management positions at Bibby Financial Services (now eCapital), i-Cubed Industry Innovators, BDC and Bank of Montreal. He is instrumental in supporting clients and partners financing requirements while driving our continued growth in the commercial lending space.