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When funds are short, margins are tight and a bad month of trading is all it might take to push your business into insolvency, it can be a stressful time.
Whether your cashflow strategy falls short, too many debtors don’t pay on time, there are sudden changes in credit terms, or a large bill arrives, taking out some form of finance can be a short term solution to an acute need for ready funds. However, relying on such finance as a long term solution can lead to problems down the line if the sources of credit you depend on dry up.
Not every Insolvent Business is a Failed Business
When a business has more debt than it has the funds to pay, help should be sought as soon as possible. A company with a solid underlying business model which has made one too many errors with cashflow (for example), isn’t necessarily doomed, but the situation shouldn’t be ignored, or closure could soon follow. One possible solution for strong but insolvent businesses are Company Voluntary Arrangements or ‘CVA’s.
How can Company Voluntary Arrangements Help?
CVA’s are a restructuring tool for businesses which have financial problems which could otherwise potentially succeed and survive.
When a business is under pressure from creditors, even under the threat of legal action for unpaid debt, using a CVA gives the company breathing space to take stock and regroup in order to continue trading.
The ability of the company to generate funds from trading, or from the sale of assets, is assessed and a plan is drawn up as to how the company will pay back its creditors either in whole or in part within a manageable timescale. The business may need to be drastically restructured to reduce outgoings, but ultimately, the goal of a CVA is to ensure its survival.
Company Voluntary Arrangements can only be set up and supervised by a Licensed Insolvency Practitioner. They have the advantage of being legally binding on all parties involved.
What’s involved in setting up a CVA?
The first stage of arranging a CVA involves a thorough examination of the company and all its affairs. Once satisfied that the company has a real prospect of surviving, the Insolvency Practitioner will draft a proposal as to how the company’s debts can be paid, reduced or restructured and if the company Directors agree, this proposal will be sent out to the company creditors to invite them to vote on whether they should accept it. If 75% (calculated by value) agree to the proposal, then the CVA is binding on all of them, even those who dissent.
From this point, all the business needs to do is keep to the terms agreed and can continue to trade their way out of debt on terms they can afford.
Why would Creditors agree to Company Voluntary Arrangements?
Companies who are owed money by another business would ideally like to be paid in full and on time. If this isn’t possible, however, they’re likely to take a pragmatic approach, one which allows them to recover as much as possible, even if that means having to wait longer than they’d like, or accepting less than they’re owed.
With this in mind, when given the option to accept a CVA or risk their overstretched customer being liquidated, then the former can be a more attractive option, as liquidation would likely see them recovering much less of what they’re owed or even nothing. If they agree to the CVA, not only could they recover more, but their customer may survive the process and continue to trade with them, which, in the long run, is far better for all parties.
If your business is struggling and is under financial pressure from creditors, then now is the time to take action. We offer a free consultation and a practical approach to helping you deal with the financial challenges both you and your business face.
The sooner you get in touch, the better the outcome will be.
Speak to us, we can help.