Until Individual Voluntary Arrangements (IVAs) came along, the main alternative for business owners with serious debt problems was bankruptcy. Unfortunately, whilst this would solve the immediate issue of dealing with overwhelming debt, it also meant that the business usually had to be closed, staff laid off and any assets such as buildings sold.
IVAs have changed all that, making life a little easier for self-employed people who find themselves struggling with debt. We take a look at how IVAs work for business owners and answers some of the questions we’re often asked by our self-employed clients.
A solution for both personal and business debts
The beauty of an IVA is that you can include both your personal and business debts within it. This includes any overdue taxes (including VAT) and National Insurance that you owe HMRC. This comes as a relief to many business owners, as HMRC doesn’t take any prisoners when pursuing debts.
You can also include loans and credit cards taken out in your company name and any unsecured debts that you owe personally. It’s important to note, however, that an IVA can’t be used for secured debts such as mortgages or Hire Purchase agreements. So if you have debts secured on property, or equipment such as printing presses, you’ll need to keep up with your payments to avoid repossession.
You can carry on trading as normal
Your day to day business operations will be largely, or completely, unaffected by your IVA. If you owe money to your personal and/or business bank through a loan or overdraft and this is included in the IVA, you’ll need to close the accounts in question and open new ones. But otherwise, you should be able to carry on as normal: keeping your finance agreements in place, and retaining your business assets and staff.
Your clients don’t need to know
An IVA is a more private solution than bankruptcy. Details will appear on the public Insolvency Service register but not in the newspapers, so it’s unlikely that your clients will find out about your debts unless you tell them yourself. This element of privacy is a big advantage of a self employed IVA, as it could help you retain business that you might otherwise have lost.
You’ll need to keep a close eye on cashflow
When you enter into an IVA, you’re committing to pay a set amount off your debts each month, usually for five years. This means you’ll need to keep a very close eye on your business cashflow to make sure you can keep making these monthly payments. You’ll also need to show the licensed Insolvency Practitioner (IP) dealing with your IVA that you can afford the payments in the first place, by presenting your accounts and cashflow projections.
If you do experience a dip in cashflow during your IVA, it’s not the end of the world. Your IP may be able to vary the amount of your monthly payments for a while, if your creditors agree to this. It’s important to note, however, that the IVA will fail if you don’t meet the payment obligations agreed with your creditors – and this could lead to your bankruptcy.
You’ll be subject to certain restrictions
An IVA doesn’t change your working life in the way bankruptcy would, but there are still some important factors to bear in mind. There’ll be restrictions on your expenditure and you probably won’t be able to get any more credit (secured or unsecured) whilst the IVA is in place. Your credit rating will also be affected for up to six years from its start date.
Also, if you own business or personal property, you may be required to re-mortgage or release equity from it during the IVA, usually in year four, for the benefit of your creditors. If you’re unable to do this, the IVA may be extended.
Debt Management may also be an option
If an IVA isn’t a suitable option, you may be able to consider Debt Management instead. You’ll need to have unsecured debts of more than £3,000 and be able to repay your creditors at least £100 a month. Debt Management is an informal solution, so it doesn’t give you the legal protection offered by an IVA, but it could help you avoid bankruptcy if your debts aren’t too serious.