There are a number of reasons that a company can become insolvent, and this is not necessarily an indication that the business model is unviable. Sometimes a temporary cash flow problem simply cannot be overcome, in which case a Company Voluntary Arrangement can provide an effective way forward. Here are eight reasons this tool can benefit your business:
1. You are protected against legal action.
Mounting pressure from creditors can lead to a winding-up order, in which case your firm will find itself liquidated. With a CVA, you are protected from legal action concerning your outstanding debts, giving you the time to find an arrangement acceptable to your creditors and feasible given your cash flow.
2. You can consolidate your debts.
If you owe money to multiple debtors, you can consolidate them all into a single, predictable monthly payment. This will make financial planning much easier and significantly simplify accounting, as well as giving you a mutually agreed timescale to clear all your debts – usually between two and five years.
3. Your cash flow becomes easier to manage.
Many businesses become insolvent not because they’re underperforming but because they’re overspending. This overspending frequently results from significant and multiple debts, whose monthly payments can exceed monthly income. A CVA will extend your repayment period and thus reduce your monthly outgoings. In addition, if your company is in very challenging financial circumstances, your creditors may write off a portion of your debt to secure the remainder, which will further reduce the monthly payments you need to make.
4. Creditors are paid at least some portion of what they are owed.
A CVA can be a good move from your creditors’ point of view as well as your own. Should your business go into liquidation, unsecured creditors may receive little or nothing of what they are owned – in most cases, just a few pennies in the pound. With a CVA, even if they agree to write off some of the debt they will still receive more than they would via liquidation.
5. You can avoid liquidation or administration.
With administration, a third party is brought in to operate the business, and with liquidation trading ceases altogether. In contrast, a CVA allows you to remain in control and stay in business while you reach a mutually acceptable compromise with your creditors.
6. You remain in control of your business.
Once you enter administration, you lose control of your company. With a CVA, no administrator is appointed and your current Directors remain in charge while you negotiate with creditors. As soon as the CVA proposal is agreed, you can return to business as usual.
7. A Company Voluntary Arrangement buys you time to turn the business around.
Insolvency is often a temporary state. One missed payment or one major account loss can create a cash flow crisis that seems insurmountable but can actually be overcome with the breathing space afforded by a CVA. In fact, most businesses should be able to turn themselves around given sufficient time and scope to restructure their finances.
8. A Company Voluntary Arrangement can be much cheaper than other solutions.
If you do not take quick action, interest and late payment penalties on your debts can spiral out of control, whilst additional borrowing may be at uncompetitive rates. In contrast, a CVA could give you the chance to take stock and restructure your debts at much lower cost.
At Cashsolv, we have extensive experience of implementing Company Voluntary Arrangements. Our expert advisers are on hand to assist you and help your business reach the right outcome.