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what is insolvency? and why?


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One Response to "what is insolvency? and why?"

  1. champ_85 says:
    Insolvency is when a company does not have the money to cover its expenses and does not anticipate the situation to change for the better. It can happen for many reasons, but a good reason is that a company expands faster than it can financially cover. If a company expects double the business the next year, it purchases equipment, material, may move to a higher cost building. However, if the economy declines, it has incurred significant expenses that it will not be able to pay due to a bad business decision. The bank will call its loan, the vendors will demand payment and the landlord will foreclose on the building. The company collapses like a house of cards, and nobody will get their money back. This is a simple example of one of many ways a company misjudges its financial abilities and spends more than it can make. Hope this helps!

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