Limiting the Risks of Limited Company Insolvency with Trade Credit Insurance

Corporate insolvency is on the rise, with each insolvency creating a ripple effect that impacts many other businesses and individuals. The UK’s business climate is challenging. Soaring costs, wage increases, lower levels of demand, and challenging borrowing rates sit alongside a stagnant economy and geopolitical unrest. In January 2024, company insolvencies were up 5% on the same month in 2023, with Cebr forecasting 33,000 business insolvencies for 2024.

When you understand what company insolvency is, learn the warning signs and know how to mitigate the risks, you put your company on the best footing for navigating these difficult times.


What is business insolvency?

Company insolvency occurs when a business can’t repay the money it owes or fulfil financial obligations such as monthly bills and wages. Once a company’s liabilities exceed its assets, it becomes insolvent.

In the UK, an insolvent company has several options. It can:

  • Reach an informal agreement with its creditors, seeking to restructure debt into manageable repayments. Though creditors will recoup their debt later than anticipated, they tend to be agreeable to this approach as they avoid losses.
  • Enter into a CVA (company voluntary arrangement)—this is a legally binding agreement between an insolvent company and its creditors. It involves paying off an agreed-upon percentage of the debt owed over a period of time (often three to five years).
  • Enter into administration – allowing the company to continue running while an appointed administrator uses the remaining assets to satisfy creditor debt.
  • Liquidating the company – whereby you close down the business and liquidate (sell) your assets, distributing the proceeds among the creditors.


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Why is corporate insolvency on the rise?

The UK is set to see a 15-year record high of businesses in liquidation as more and more company owners find their liabilities stacking up. The British economy has had much to contend with. The pandemic and its economic aftershock came hot on the heels of Brexit. Add to this mix the soaring energy and fuel costs, importation taxes, and a generous dose of inflation, and UK businesses find themselves in a period of great financial instability.

With volatile material prices, rising wage costs, and the knock-on effect of insolvencies within a company’s industry, even previously stable businesses can find their outlook changing. Companies haven’t faced such challenges since the Credit Crunch, and although there have been some positive movements in energy costs and inflation, there are still hurdles to face.

Interest rates, in particular, remain a concern. Many companies have been burned by high interest rates – especially those who took on debt when the rates were low, before and during the pandemic. Though the government support during the Covid restrictions served as a lifeline to many businesses with debt, there’s now no escaping the cost of borrowing. Moreover, higher interest rates lead to lower economic spending, making it harder for companies to work their way out of the debt pit.


Which sectors are most at risk?

All business sectors have faced rising insolvency levels, but some are taking the brunt of the global and economic downturn. In 2023, the sectors with the highest risk of insolvency were:

  1. Construction
  2. Support services
  3. Real estate and property services
  4. Professional services
  5. General retail
  6. Telecommunications and information technology
  7. Health and education
  8. Media
  9. Financial services
  10. Food and drug retailers

By examining several of these sectors, you can start to see why insolvencies are increasing across various industries.



The construction industry faces the highest company insolvency levels in the UK, representing 17% of all insolvencies in 2023. A number of factors contribute to this issue. High interest rates have caused a dip in the housing market, putting even construction stalwarts at risk. High labour costs contribute further to the strain, while the rising cost of materials has had a catastrophic effect on the industry. These material and labour costs make building work unaffordable for many as homeowners deal with the cost-of-living crisis.


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In the UK, 2,331 retail insolvencies were recorded during 2023, representing a 22.6% increase on the previous year. Pure play online retailers were hardest hit, followed by niche goods and department stores. Across the board, high-street retailers remain under pressure due to consumer shopping habits, which remain largely online-focused. Issues with supply chains, high interest rates, wages and material costs, and consumer uncertainty mean that retail continues to have one of the highest insolvency rates.



Corporate insolvency is growing within the hospitality industry, with a 37% rise in 2023 from the previous year. The cost-of-living crisis has hit this sector hard as customers cut back on non-essential expenditures. The high cost of food has narrowed profit margins, putting tremendous pressure on businesses. The industry also faces staffing issues, with worker shortages set to be exacerbated by new immigration legislation. This lack of staff power has limited the ability of certain companies to deliver the level of service they need to remain profitable. The latest National Living Wage level kicked in during April 2024, adding more financial pressure to a struggling industry.


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Metals and chemicals

The metal industry saw a 27% increase in insolvencies in 2022 from the previous year, with fabrication companies being hardest hit amid fluctuating metal prices. 2023 benefited from stability in metal costs and an easing of energy and transportation, but the government’s renewable levies and capital charges regulations will not be implemented until 2025, leaving companies vulnerable to the challenging climate.

The British chemical sector had a challenging year in 2023, with global demand slowing, leading to a 14% decrease in annual revenue. Inflation is thought to be a key contributor to this decreased demand. As companies work through surplus inventory, there is a distinct lack of movement, leading to an increased risk of insolvency.


The key risks and how to spot them

Running a business is time-consuming, and taking your eye off the ball can be surprisingly easy. Focused on the day-to-day activities, a business owner can lose sight of the bigger picture, allowing company insolvency to creep up on them.

There are key contributing factors that an owner needs to be aware of to mitigate their risks of corporate insolvency, including:

  • Poor account management – which can lead to misuse of the company’s budget, overspending and a failure to repay creditors. Poor account management can make something like a large HMRC invoice the final push that nudges a business into insolvency.
  • Rising vendor costs – currently a pressing issue as the price of materials and manufacturer overheads continue to increase. There are several adverse outcomes associated with rising vendor costs. These increased costs could make your business liabilities outstrip your assets. Furthermore, as you try to pass your increased costs onto your customers, you may lose business as customers look for cheaper alternatives elsewhere.
  • Lack of agility – where a company fails to respond to the changing and evolving needs of their customer in a timely manner. When your product or service is out of step with current demands, your income can drop quickly, heightening the risk of insolvency.
  • Legal action – a process that can leave a company with a substantial financial burden if the relevant insurance cover is not in place.
  • Non-payment by a customer – this can be particularly problematic if your business relies heavily upon a small number of customers.

There are also important signs that you may be on your way to business insolvency, which you should learn to watch for.


Inability to borrow

If you’ve reached the limit of your business account overdraft, cannot secure (or afford) further borrowing from the bank and are being refused credit by your suppliers, it’s time to carefully assess whether your company is still solvent.


Payment demands and unpaid wages

Are threats of legal action landing on your desk? Has a creditor made a Statutory Demand for payment? Is the HMRC chasing a tax or VAT bill? If month after month, you’re pushing back payments as far as possible, this signals a cash flow issue that may be beyond repair.

Insolvency is highly likely when you can no longer afford to pay your staff wages.


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Is my company insolvent?

The signs of insolvency may be there, but to accurately assess the financial standing of your business, you can take two tests to ascertain your solvency status.


Balance sheet test

A balance sheet test lets you see if your liabilities outweigh your assets. It should be performed by a financial specialist who can correctly value your assets and calculate the company’s liabilities.

If your liabilities are greater than your assets, you would be unable to pay off your creditors even after your assets were liquidated, and your business would be considered insolvent. If your assets and liabilities are close to equal, your company could be regarded as on the brink of insolvency since one financial hiccup could push the balance the wrong way.


Cash flow test

The cash flow test assesses whether your business can pay its debts promptly—as they fall due or within a time frame that doesn’t result in the implementation of a Statutory Demand or the threat of legal proceedings. If your creditors consistently need to chase you for payment because you have failed to cover your debt within their payment window, this raises a red flag for insolvency.


Taking action

If insolvency tests indicate that your company is heading toward insolvency (with assets equal to or only just outweighing liabilities), you must take swift and robust action.

To avoid company insolvency, you should understand what is going wrong within your business and pivot accordingly. Contact creditors as early as possible if payments are becoming an issue and organise a repayment plan. A carefully restructured payment plan could help create the balance you need to maintain solvency as you manage your debts.

Payments to HMRC are a key outgoing in most businesses, and difficulties in paying can escalate if you fail to act accordingly. You may be able to alleviate financial pressure by applying for HMRC’s Time to Pay arrangement. A payment plan, the Time to Pay arrangement, is helpful because it is tailored to a company’s individual financial situation and offers payment flexibility, with the potential for an extended repayment period.

Seek professional advice, even if you think you understand what is going wrong within your business. A financial adviser will help you devise the safest and most effective plan for your business, whether that’s stimulating growth or dealing with a short-term cash flow issue. An expert will also be able to advise whether actions such as borrowing are simply papering over a deeper problem.


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Mitigating your risks

There’s no escaping the fact that nearly all industries have been under mounting pressure from national and global factors that are outside their control. The good news is there are factors you can control to help you mitigate your company’s risks.


Financial management

Sadly, solid financial management processes within a company are often implemented too late. Strong financial management involves meticulous analysis of the company accounts regularly, alongside risk management strategies. Financial risks can change within an industry. It’s essential to have steps in place that allow you to assess the risks associated with new trading partners, suppliers, and creditors based on the current industry climate. Great financial management is all about spotting issues before they happen. That’s why you should hire financial experts with industry-specific knowledge.



Companies that rely on a few customers and suppliers are vulnerable. Non-payments and late deliveries can spell disaster for a business, so diversification is critical to ensure a more even spread of your finances and financial risks. Expand your client base and source from multiple suppliers, and you’ll face a reduced risk should one of these suffer insolvency.



You could be taking all the proper steps to guard against insolvency. Yet, an unforeseen event may still land your business with a significant financial burden, contributing to company insolvency. In addition to standard covers like public and employer’s liability and professional indemnity, it is wise to consider trade credit insurance during these turbulent times. This insurance policy protects your business against the losses you would face from a customer’s insolvency or default on payments.


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Trade Credit Insurance

Business insolvency is increasing across all industries. Even if your company’s balance sheet looks healthy, things could rapidly change if an important customer becomes insolvent. Trade credit insurance offers your business financial protection from invoice non-payment. It will provide cover against the commercial risks of non-payment due to insolvency or a default.

Though trade credit insurance offers financial cover should a company you work with become insolvent, it is also an important safeguard against your own insolvency. This type of insurance can be particularly beneficial if:

  • A high percentage of your income comes from a small number of clients.
  • You have limited assets, meaning a bad debt could quickly leave you financially vulnerable.
  • Your business is experiencing a high frequency of invoice late payments.
  • Your industry or those you conduct business with are facing high insolvency levels.

Trade credit insurance supports businesses with their financial risks. It assesses potential new clients, monitors current clients, and uses tools such as public records, financial statements, and information provided by other businesses to mitigate risks when making business decisions.

Park Insurance has been helping to protect businesses for over 30 years and understands the unique industry-specific risks encountered. When you take out trade credit insurance with Park Insurance, you’ll receive a tailored policy that reflects your company’s bespoke needs and associated risks.


Frequently asked questions

Does trade credit insurance protect a company against its own insolvency?

A trade credit insurance policy will not pay out if your business becomes insolvent. However, it does help guard against insolvency by protecting you against non-payment.


Is trade credit insurance expensive?

The cost of trade credit insurance is calculated according to the size of your business, the trading limits you need, and the financial stability of those you trade with. As a rough estimate, you should budget 0.5% of your annual sales for your trade credit insurance premium.


Where can I get help if I’m facing insolvency?

You can source a local insolvency practitioner on the HMRC website and find advice at Insolvency Service.