Warning Signs of Insolvency – 10 Red Flags Directors Can’t Ignore
By Keywood Group
Insolvency rarely happens overnight. Most businesses show warning signs long before the crisis point is reached. The challenge for directors is recognising those signs early enough to act.
At Keywood Group, we often meet directors who tell us, “If only we’d sought help sooner.” The reality is that spotting and responding to distress early can mean the difference between a viable rescue and a forced liquidation.
Here are 10 common red flags of insolvency that every director should be aware of in 2025.
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Cashflow Crunches and Mounting Creditor Pressure
If you’re constantly juggling which invoices to pay first, relying on short-term fixes, or receiving repeated payment demands, it’s a strong signal of distress. Insolvent businesses often run out of liquidity before anything else.
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Overdue HMRC Liabilities
Falling behind on PAYE, VAT, or Corporation Tax is a major red flag. HMRC is one of the UK’s most active creditors, and late payments can quickly lead to enforcement action or winding-up petitions.
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Strained Supplier Relationships
When suppliers start demanding upfront payment or refusing to extend credit, it usually means they’ve lost confidence in your ability to pay. This can escalate quickly and disrupt operations.
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Falling Margins Despite Stable Revenues
If your sales remain steady but profits are declining, hidden cost pressures may be eating away at cash reserves. In today’s high-inflation environment, rising wages, energy bills, and borrowing costs are hitting margins hard.
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Difficulty Securing Credit or Refinancing
Lenders are cautious in 2025, and struggling companies often find it difficult to extend credit lines, refinance loans, or access new funding. If the bank is saying no, it’s a sign you need to review your financial position urgently.
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High Staff Turnover and Morale Issues
Employees often sense financial instability before directors acknowledge it. Late wage payments, rumours about cash problems, or cost-cutting measures can drive morale down and key staff out.
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Director Loans and Personal Guarantees
If directors are plugging financial gaps with personal funds or signing guarantees for short-term finance, it may keep the lights on — but it also increases personal risk if the company fails.
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Unpaid Wages or Pension Contributions
Failure to meet payroll obligations or pension contributions is a statutory breach and a key indicator of insolvency. It also damages trust and makes it harder to retain staff.
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Legal Threats and Winding-Up Petitions
CCJs, statutory demands, or winding-up petitions are clear signals that creditors are losing patience. At this point, directors must act quickly to prevent compulsory liquidation.
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Reliance on Short-Term Funding
If your business is depending on payday-style loans, expensive invoice factoring, or repeated emergency borrowings, you may be masking deeper structural issues. These quick fixes can worsen long-term viability.
What to Do if You Spot the Warning Signs
Recognising one or two of these signs doesn’t always mean your company is doomed. But ignoring them is risky. The earlier you seek professional advice, the more options you have — from informal creditor negotiations to formal rescue mechanisms like administration or a Company Voluntary Arrangement (CVA).
Final Thoughts
Insolvency doesn’t just affect big corporations — SMEs are equally at risk. By monitoring these red flags, directors can act early, protect their businesses, and in many cases avoid liquidation entirely.
At Keywood Group, we specialise in helping businesses in financial distress find a way forward. If your company is showing any of these signs, don’t wait until it’s too late. Contact us today for a confidential, no-obligation conversation.
