Business – 5.1 Business finance – The need for business finance | e-Consult

A shortage of finance restricts a company’s ability to meet its short‑term obligations (e.g., paying suppliers, wages, rent) and to invest in growth or innovation. When cash inflows are insufficient to cover outflows, the firm may become insolvent – unable to pay its debts as they fall due.

Bankruptcy is a legal declaration that a company cannot meet its debts. It often leads to the appointment of a trustee who will either restructure the business or realise its assets to satisfy creditors.

Liquidation is the process of winding up a company’s affairs, selling off assets, and distributing the proceeds to creditors in a statutory order. It usually results in the company ceasing to exist.

Administration is a rescue‑oriented procedure where an administrator is appointed to take control of the business, with the aim of rescuing the company as a going concern, achieving a better result for creditors than immediate liquidation, or at least obtaining a better return for them.

Thus, insufficient finance can trigger insolvency, leading to one of these formal procedures depending on the severity of the problem and the prospects for recovery.