Can I start a Business whilst in an IVA?
When IVAs (Individual Voluntary Arrangements) were first introduced, they were actually designed with business owners in mind. The 1986 Insolvency Act introduced IVAs as a way for businesses to deal with their debts. This benefitted both businesses and their creditors, since it meant that they could avoid bankruptcy, and be given another chance to flourish, whilst creditors made back more of their money than they would if the company had been bankrupted.
IVAs can still be used by business-owners today, but because they are a form of legal insolvency, people often wonder what the implications of an IVA are for existing or new businesses. We clarify this below.
It is entirely possible to enter into an IVA if you are self-employed, but there are some key differences to bear in mind.
- Flexible Contributions
If you are self-employed, your monthly income is likely to be more irregular than someone who works for a company. Because of this, what you pay towards your IVA can be more flexible. You will need to prepare a cash-flow statement to advise your Insolvency Practitioner (IP) how much your income fluctuates from month to month. Self-employed IVAs are designed to take this into account, and you might end up increasing or reducing your payments over the course of the IVA. This is totally acceptable, as long as you keep in touch with your IP to advise them of changes in your circumstances so payments can be adjusted.
- Business-Related Credit
Understandably, being in an IVA reduces your access to credit. However, when someone who is self-employed enters into an IVA, things can be slightly more flexible. You will still need your IP’s permission to obtain more than £500 of credit, but you may be able to exclude one line of business credit from your IVA, and repay them separately, in order to continue your working relationship.
- Business Bank Accounts
If your business account is overdrawn, and you need this line of credit to cope with the running costs of your business, you may be able to keep the account. However, if it is overdrawn by a large amount, it might be more sensible to include it in your IVA agreement. Additionally, if you hold other lines of credit with the same bank, such as a business loan, the bank may exercise the ‘right to offset’. This means they could seize money paid into your business account to offset your other debts. If this is a risk, opening a new business account, and including the old one in your IVA, is usually the best option.
IVAs are available regardless of whether you are a sole trader or own a limited company. It’s also possible to register your business as a limited company whilst you are in an IVA. Whilst in an IVA, unlike bankruptcy, you are completely free to be the director or shareholder of a company, so making the decision to go limited will not be affected by your IVA.
It is important to carefully consider any changes to your employment during an IVA, though, as you will need to continue making your agreed-upon payments in order to successfully complete it. As mentioned earlier, some flexibility is allowed, but if you will be unable to make your original payments for an extended period of time, your creditors will have to agree to the lower amount, which they might not be willing to do. This could put your IVA at risk of failing, which can sometimes lead to bankruptcy.
Starting a new Business
There is nothing stopping someone who is in an IVA from establishing a new business. Like all financial decisions, this should be carefully considered, however. Although starting a new business can be the right long-term decision, it may be advisable to wait until you have completed your IVA, or even until you have rebuilt your credit score. This is because you may struggle to obtain credit and a business bank account during or immediately after an IVA – when potential banks, and other lenders, see you have entered into an IVA, they will know that you have had trouble repaying credit in the past and be more cautious about lending to you. Any potential changes to your employment status should be discussed with your IP.
For more advice about whether an IVA could be the right solution for you and your business, you can contact a Creditfix advisor on 0808 2085 198. You can also find out more about self-employed IVAs here.