Not every company that cannot make a payment this week is insolvent. Confusing a temporary cash-flow gap with genuine insolvency leads to bad decisions in both directions.
The cash-flow test
A company is cash-flow insolvent if it cannot pay its debts as they fall due. A one-off timing gap, where the money is genuinely coming, is not the same as a sustained inability to meet obligations.
The balance-sheet test
A company is balance-sheet insolvent if its liabilities exceed its assets. A business can be short of cash this month yet solvent overall, or the reverse — which is why you look at both tests, not one.
Why the distinction matters
If it is a gap, forbearance and short-term measures fix it. If it is genuine insolvency, directors have specific legal duties and should take advice quickly. Getting the diagnosis wrong wastes time you may not have.
If you are unsure, take advice early — a licensed insolvency practitioner or free service can help.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: The difference between insolvency and a cash-flow gap, Understanding business insolvency options, Directors' duties when a company is struggling.