A Company Voluntary Arrangement (CVA) can be the lifeline that a company struggling with debts needs, a formally agreed payment plan, allowing it to repay its creditors in a controlled and organised way over a period usually lasting five years. However, there are things to evaluate when considering this method of debt management. With this in mind, what are the advantages and disadvantages of a CVA?
Advantages of a CVA
Choosing to go into a CVA has many benefits, from allowing you, as a director, to remain in control of the business, to sweeteners like no upfront costs to pay. It’s straightforward to understand with no hidden loopholes, with the monthly consolidated payments coming to us for us to distribute amongst your creditors for you.
Allows the company to continue trading
Directors often invest lots of time, money and resources into establishing a company and making a name from it. As a result, it can be hard to consider putting the company to bed when financial difficulties start to hinder the business, particularly when you believe it has a viable future. A CVA allows the company to stay open and trading, with a good chance of stabilisation and recovery with the correct approach and guidance.
Directors retain control of the business
The director, who knows the business inside out, would maintain control of the company throughout. Thus, CVAs are often an appealing way for directors to manage their business debts. Moreover, combining the director’s intimate knowledge of the company with the professional business guidance which a CVA will offer could make a winning partnership, ultimately ensuring the steady recovery of the company.
Unaffordable debts are written off
Any unsecured debt remaining after completing the CVA is written off. This could reduce your debts owed by a substantial amount. It takes away the worry of not knowing how you’ll repay your debts because they’re reduced in size to fit your affordability while also allowing creditors to get a return.
No upfront costs
Due to the costing structure of a CVA, which allows us to take our fees from the first initial instalments, and then a percentage of the consecutive payments for managing the ongoing plan, there are no upfront fees to pay. We deduct our fees from what is taken from your company bank account each month, and that sum is strictly calculated on what you can afford.
Creditor pressure and interest rates frozen
Any of the debt submitted to the CVA has its interest frozen; we deal with all creditor pressure, taking the stress away from you.
Disadvantages of a CVA
Despite the advantages of a CVA, there are drawbacks to consider when deciding if a CVA is right for your business.
Company credit rating is affected
A CVA negatively impacts a company’s credit rating, but if the company is in debt already, its credit rating will probably already be damaged. As such, during the first few years of the CVA, you may have to pay for goods on a proforma basis as it will be challenging to get credit. However, once the CVA is over after a period of usually 3-5 years, the company can start to gradually rebuild its credit rating by borrowing on a low-risk scheme and paying liabilities back regularly.
Legal obligation to adhere to the scheme
While there is an element of flexibility in that amendments can be made to the agreement (if accepted by creditors), CVAs can be somewhat rigid. In general, the CVA terms will be quite strict in what it expects the company to pay and over what period. Not adhering to the requirements of the proposal will likely lead to compulsory liquidation.
Failure of a CVA leads to further insolvency measures
A CVA could end up being the precursor to further insolvency procedures if it fails. However, these procedures would be inevitable without an attempt to pay back your creditors and effectively manage your debts. A CVA is one of the few ways to give your company a chance of remaining open and continuing with its trade.
Sometimes, a CVA might not be suitable for your company, either because the volume of debt is too much, or if your creditors reject the proposal. In either case, you could benefit more from an alternative debt-relief solution.
If it’s not possible or feasible to undergo a CVA, you can explore company administration, which involves restructuring the company, allowing trading to continue with the intent of rescuing the business. If your debt is to HMRC, you can explore applying for a Time to Pay Arrangement to repay your liabilities to the tax office.
Sometimes, the level of debt can be of such a degree that trading on isn’t feasible, and you’d be better off closing the company down voluntarily before your creditors wind it up. In this case, a Creditors Voluntary Liquidation (CVL) may be the best way forward to avoid compulsory liquidation.
There are both advantages and disadvantages to consider when deciding if a CVA is right for your business. However, ultimately it is important to remember that a well-put-together CVA is one of the few routes out of debt which allows the company to remain open, trading, and with the director at the helm of proceedings. It gives companies a good chance at a fresh start, with unaffordable, unsecured debt entirely written off upon its completion.
How we can help
We can assess your company’s situation completely free of charge, with all initial advice and telephone or face-to-face meetings given without cost or obligation. We can see if a CVA would be appropriate for your company to undergo and fill you in on the ins and outs of the whole procedure, guiding you through the collation of information and keeping you informed throughout the process.
Book a free telephone consultation with one of our initial advisers