Even the most successful business will have debts and loans to repay. This form of credit and repayments is not uncommon, with businesses using this strategy to support cash flow and business growth.
However, sometimes debts and overheads can become too much, especially if your order book has slowed down.
Rather than jump straight into administration, if you are struggling to repay debts and keep on top of overheads, you can look at the process of company voluntary arrangement.
At Direct Route, our team works with numerous companies and their credit control processes helping to maintain control over cash flow and to support those who may need a company voluntary arrangement to help them through a challenging period.
In this post, we explain more about CVAs, their advantages, and some of their drawbacks.
Company Voluntary Arrangement Explained
A company voluntary arrangement is a legally binding agreement that allows a business struggling to repay its debts and overheads to repay these at an agreed amount over a set period of time.
A financial solution that provides businesses with the opportunity to turn their struggling business around, a company voluntary arrangement reduces monthly repayments, helps to ease business pressure, and ensures that creditors continue to receive payment back.
This formal type of agreement falls within the Insolvency Act 1986, so it is governed and legalised for all parties. It can last between two and five years, with longer terms available for exceptional circumstances.
It’s important to note that for a CVA to proceed, the company must have an agreement with over 75% of its creditors. Which means you have to work with them to gain their buy-in.
If you do not keep up with the repayments outlined in the CVA, you can still face legal action, so you must ensure that everything proposed is feasible in the long term.
Note: A company voluntary arrangement is only suitable for unsecured creditors; the agreement does not bind secured creditors.
To find out more about debt collection practices and the collection of late payments, make
sure to read our latest post on High Court Enforcement.
Pros and Cons of Company Voluntary Arrangement
Advantages:
- Implementing a CVA can help reduce company debts, making them much more manageable. Easing the pressure and providing a little breathing space.
- Businesses can continue to operate as you are provided with time and an opportunity to restructure operations, processes, and strategies for the better.
- You can avoid going to court, making this your last resort if the CVA fails. This means costs are much lower than filing for insolvency, receivership, or liquidation.
- Company directors can remain in control of the organisation (however, it is unlikely that during this time, they will take dividends from the organisation).
- CVAs are private, so you can, to some degree, protect your business name and reputation.
Disadvantages:
- It does cost to enter into a company voluntary arrangement. For example, you will need to pay for the insolvency practitioner/team who will be overseeing the CVA, the cost of the agreement, the statement of affairs, etc.
- A CVA will affect your credit rating, so it may be difficult to access lines of credit during this time.
- It can be challenging to get creditor acceptance of the agreement.
- It’s important to be aware that the company can still go into liquidation if the CVA terms are breached.
- It can take longer to repay the debts owed.
Process of Company Voluntary Arrangement
If you are struggling to repay debts and thinking about entering into a company voluntary arrangement, you will need to:
Look to appoint an insolvency practitioner and instruct them to prepare the CVA document.
The agreement is then filed with the court and sent to outlined company creditors.
The creditors will then have 17 days to review the agreement and what is being proposed before a formal meeting is held.
At the CVA meeting, the creditors will then vote for or against the CVA. The company will need 75% of creditors to agree on the implementation of the CVA for it to go ahead.
Once agreed and in place, a company voluntary arrangement supervisor will collect the agreed monthly payment and distribute this to the creditors.
Small Business Debt Collection
With any form of business debt and when looking for support for the late payment of commercial debts, it is always advisable to speak to a professional.
At Direct Route, we work with small to medium-sized businesses to support the collection of unpaid and late invoices.
We know the catastrophic consequences late payments can have on your cash flow and how this ultimately affects your business’s ability to repay outstanding debts.
That’s why we implement robust credit control procedures that work for you and your customers.
Our professional team of debt collectors has a high success rate of collecting late payments of commercial debts, and our professionalism and experience also ensure that we maintain positive working relationships with clients.
To find out how we can help you, call us today on +447860 197476 or email: memberbenefits@directroute.co.uk