Insolvency vs Illiquidity: The Similarities and Differences
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What Is Illiquidity?
Accounts payable Bills/utility payments Loan payments Taxes Accounts receivable Cash Inventory Securities: stock, treasury bills, or any security that can easily be sold
How Does Illiquidity Work?
What Is Insolvency?
How Does Insolvency Work?
Insolvency vs Illiquidity Compared
Are forms of financial distress Occur when a company is unable to pay upon its debts because of a shortage of assets Represent an immediate problem that must be addressed Can lead to bankruptcy (although insolvency is more serious) Can be solved
Illiquidity is a short-term problem; insolvency is a long-term problem Illiquidity is when a company doesn’t have enough in liquid assets to cover its current debts; insolvency is when a company's overall debt exceeds its total assets.
Dealing With Liquidity Issues
Sell off unproductive assets. Any asset that is not generating cash flow isn’t doing your business any good. Consider selling any idle machinery, unused computers, or rarely used vehicles. Reduce overhead costs wherever possible. You may be able to improve cash flow by reducing how much you spend on marketing, subscriptions, and any other indirect expenses. Be aggressive with accounts receivable. Don’t let customers go months on end without paying their invoices. Call and/or send reminder emails to get them to pay sooner. Look into a line of credit. A business line of credit might help you cover gaps in cash flow due to payment schedules. Consider refinancing your debt. This could lower your monthly bill. However, it may mean paying more in interest over the long run. Consider invoice financing: Invoice financing can help solve short-term cash flow problems by providing immediate payment for your unpaid invoices (in exchange for a fee).
When Does Illiquid Become Insolvent?
Dealing With Insolvency
Attack your debt. List all of your company’s debts in order of priority. Focus on debts that need to be paid immediately (such as those that could interrupt operations or lead to legal trouble if not paid on time) first. Follow up on unpaid invoices. Be sure to collect on any money that is due to your business. Reach out to your creditors. If you explain your current situation, they may be willing to restructure your debt to make your payments more affordable. Find ways to decrease spending. Cut out all unnecessary costs and also look for cheaper suppliers for materials, stocks, and/or insurance. Boost your customer base. Try to increase sales by using customer feedback, increasing social media and email marketing, and learning from other businesses.
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Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.
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