A Company Voluntary Arrangement (CVA) is a legal procedure that can be invoked if you find your business is insolvent. In simple terms, it’s a legally binding agreement with your creditors in which they agree to receive a fixed proportion of what you owe them in return for allowing you to remain in business.
But what are the advantages compared to other forms of insolvency?
1 You stay in control of your company
With other forms of insolvency, an administrator is likely to be appointed to run or wind up your business. With a CVA, you remain at the helm during the restructuring period, and your customers won’t notice any obvious changes.
2 You get breathing space from legal action
Whilst the CVA is being negotiated, you have protection against legal action from your creditors. This will give you the breathing space to concentrate on running and restructuring your business, without having to respond rapidly to writs landing on the doormat every day.
3 Your cash flow becomes much simpler
Many companies that find themselves insolvent do so not because they’re underperforming but because they’re overspending.
With a CVA, you can consolidate your debts into a single, lower monthly payment that will free up your cash flow. You can also restructure your business to reduce your costs. Moving to smaller premises, making redundancies, renegotiating your terms of business and changing suppliers.
4 You save money
If you don’t act quickly, interest and late payment penalties on your debts can soon spiral out of control, and you can find yourself borrowing at punitive rates to stay in business.
With a CVA, you have the time to take an overview of your business and its prospects and implement the right financial solutions.
5 You cannot be accused of wrongful or fraudulent trading
When a company is facing insolvency but continues to trade as though nothing has happened, its directors can find themselves accused of wrongful or even fraudulent trading.
The former is a civil offence but can lead to criminal prosecution, whilst fraudulent trading is always a criminal matter. In particular, the authorities take a very dim view of companies that continue to take deposits from customers, arrange credit with suppliers and pay generous emoluments whilst the directors know (or should reasonably know) that the business is heading for the buffers.
6 You can stay in business
This is the big one – with a CVA you won’t wind up bankrupt and out of business. Meanwhile, your creditors receive some proportion of what they’re owed and your customers have no reason not to continue dealing with you.
But what are the potential disadvantages?
1 You lose your credit rating
Following a CVA, your company will continue without a credit rating, so you may struggle to secure further finance.
Equally, since your suppliers will have taken a haircut on what you owe them, they may not be keen to do business with you again and you may have to establish new supply chains.
2 You need to stick to your payment plan
Once you have agreed a solution with your creditors, it’s vital that you stick to it to stay in business.
In particular, you should never default on any of your debts (corporation tax, VAT or PAYE) to HMRC, who can wind you up at a moment’s notice if you try their patience.
3 Your creditors must agree to the CVA
For the CVA to be approved, 75% of your creditors (by amounts owed) have to agree to the arrangement. They are under no obligation to do so, and if they decide not to be pragmatic then you will find yourself back at square one.
4 Your CVA will only cover unsecured creditors
Secured creditors, such as your bank or mortgagee, have additional rights over unsecured creditors and will not be party to the CVA.
They have the power to appoint an administrator or withdraw funding at will, so don’t be tempted to rob Peter to pay Paul whilst restructuring your finances.
5 CVAs take time
A CVA is not an arrangement that can be put together overnight, so don’t be tempted to wait until the last minute if problems are looming.
If you let things get down to the wire a CVA won’t be an option, and chances are you won’t be staying in business.
What are the alternatives to a CVA?
If your company enters administration, an insolvency practitioner will take control of the business while you attempt to turn your finances around.
As with a CVA, you are protected from legal action during the procedure, and you still have the option of entering a CVA if both you and your creditors feel this is the right way forward.
The biggest drawback is cost: administration is not a cheap procedure, but it is often preferable to the alternatives.
Liquidation involves closing the company down and selling its assets to generate cash to pay creditors. Unlike administration or a CVA, liquidation puts the company permanently out of business, so this is not a step to take lightly.
In any case, the decision may not be yours: whilst you can voluntarily liquidate, your creditors can force you to do so if they have lost confidence in your ability to pay or trade responsibly.
4 Emergency finance
As already noted, emergency finance isn’t always the cheapest way to borrow, but it can help you stave off administration or liquidation.
With an emergency loan, you could have the funds inside your account in under 24 hours, so this is an ideal solution if you’re facing a sudden cash flow crisis and a huge bill you simply can’t pay.
However, for obvious reasons an endless series of emergency loans is not a realistic way forward and would clearly indicate underlying and ongoing problems with your business and its cash flow.
Don’t forget to talk to Cashsolv
Cashsolv are the experts in CVAs and all forms of business finance, and we will find the right solution to keep you trading. If you need fast finance, we’ll organise an emergency loan and if you have ongoing cash flow problems we can arrange asset-based finance (whereby you secure any borrowing against your business assets) or invoice factoring or discounting.
The latter solutions involve borrowing against the value of your invoices, as soon as you issue them so it’s like getting paid immediately, putting an end to the problem of high-spending but late-paying customers.
With factoring, we would assign experienced credit control professionals to secure early payment, thus minimising your interest, whilst with invoice discounting you would retain control of your own debtor ledger.
If the worst comes to the worst, we will do our utmost to arrange a CVA with your creditors. Allowing you to trim your debts, restructure your finances and stay in business, without any risk of prosecution for wrongful or fraudulent trading.