2 min read
What it means
UK law uses two solvency tests: the balance-sheet test (assets exceed liabilities, including contingent ones) and the cash-flow test (the company can pay debts as they fall due). Failing either means the company may be insolvent. Cash flow is the day-to-day movement of money; solvency is the underlying question of whether the company can ultimately stand behind its obligations.
What this means for your company
Once a company is or may be insolvent, directors' duties shift towards protecting creditors — continuing to trade or take on debt can create personal liability for wrongful trading. If you are borrowing to bridge a genuine short-term gap, that is normal and prudent; borrowing to plug an accelerating loss is not. Take free debt advice early if in doubt.
What it means for you
Credicorp lends to your company, not to you personally, and takes no personal guarantee. See business loans or apply online.
Frequently asked questions
Can a company be profitable but insolvent?
Yes — if it cannot pay debts as they fall due (a cash-flow insolvency) despite booking profit. Equally it can be loss-making one year yet remain solvent with strong reserves. The two are separate tests.
What should a director do if the company may be insolvent?
Stop and take advice from a licensed insolvency practitioner or a free service. Document decisions, avoid preferring some creditors over others, and do not take on debt you cannot reasonably expect to repay.
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Read →Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.