A CVA is an agreement to reduce a company’s unsecured debt payments. It normally lasts 3-5 years. If the terms of the agreement are met 50% or more of the debt may be written off.
- How a CVA works
- What happens to company debt?
- Is the company Credit Rating affected?
- Do customers have to be told if you start a CVA?
What is Company Voluntary Arrangement?
Company Debt Expert James Falla describes a Company Voluntary Arrangement. For more business debt advice visit www.companydebtadvice.net
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How a CVA works
Once a CVA (Company Voluntary Arrangement) is in place the company starts making reduced payments to its unsecured creditors. The payments are pre agreed as part of the Arrangement. This then frees up cash to allow it to trade normally.
In order for the Arrangement to start the creditors first have to agree to the reduced payment proposal. They will normally agree to do this if it is clear that it gives them the opportunity to recover some of the money they are owed. The alternative may be that they would lose everything if the company was closed.
Once in place the CVA is legally binding on all the included creditors. As a result they are no longer allowed to start legal action against the company to recover their debt. In addition any legal action they are currently taking must be stopped.
What happens to Company Debt in a CVA?
Only unsecured debt can be included in a CVA. These include things like bank loans and overdraft facilities. In addition debts to suppliers and even outstanding Tax and VAT owed to HMRC. However secured debts such as a commercial mortgage or lease agreement cannot normally be included.
Generally speaking the creditors included in the Arrangement will not be paid in full. They will receive a percentage of what they are owed during the Arrangement. However after it ends they agree to write off any outstanding balance.
A CVA will often result in 50% or more of the company’s debt being written off.
How is the Company Credit Rating affected by a CVA?
The fact that a company has started a CVA will be recorded on its credit file. This will have a negative effect on the company credit rating. As a result taking new credit in the short to medium term will be made very difficult.
Credit facilities currently available to the company may also be closed. Normally debts owed to the bank will be included in the Arrangement. As such it is understandable that these will be lost. Credit provided to the company by suppliers may also be withdrawn meaning future purchases have to be made in cash.
A poor credit rating may also be an issue if the company wants to bid for work with larger organisations. If a potential customer carries out a credit check as part of their due diligence procedure the CVA will be highlighted. This may prevent the award of the business.
Do Customers have to be told if you start a CVA?
If your company starts a Company Voluntary Arrangement there is no obligation to inform your customers. The Arrangement is a private agreement between the company and its creditors.
However if your company starts a CVA you may want to consider keeping your key customers informed. Sooner or later they will probably find out. Very often it will be one of your competitor’s who breaks the news to them.
Most customers will not understand what a CVA means and they will be naturally worried about the financial viability of the company. As such it is better that the news comes from you so you can explain exactly what is happening and reassure them that they will remain unaffected.
