IVAs and Business Loans
IVAs provide a lot of freedoms compared to bankruptcy. One advantage that an IVA has over other formal debt solutions is that you can continue to act as director of a company, or as a sole trader, throughout its course. You could even start a new business during the course of your IVA if you decided to do so.
Despite this advantage, all IVAs do restrict your access to credit, which can make establishing or running a business considerably more challenging.
Challenges to Accessing Credit in an IVA
When a company has run into problems with debt in the past, it is perhaps unsurprising that potential future lenders are generally reluctant to extend further credit. This can be an obstacle when running a business, or establishing a new one. Here is what you need to know about limitations to obtaining business credit, if you decide a self-employed IVA is for you:
- Permission from your Insolvency Practitioner (IP)
In any IVA, even a self-employed one, you must obtain permission from the IP dealing with your case to apply for credit worth more than £500. If you expect your business to require a continued line of credit in order to continue functioning, this should be discussed with your IP and creditors when the IVA terms are originally being negotiated. Because your creditors will benefit more if you continue to trade and make an income, they may be willing to allow you to continue to use existing lines of credit – such as an overdraft on a business bank account – as part of the agreement. Nonetheless, you will need permission from your IP to obtain further credit.
- Credit Ratings
All IVAs, including self-employed IVAs, are recorded online on the public Insolvency Register. This means that when credit reference agencies (Experian, Equifax, and Clear Credit in the UK) determine your credit score, they are able to see that you have had trouble paying back your debts in the past and will accordingly reduce your score. This means that even if you do obtain permission from your IP to apply for credit, you could struggle to find lenders willing to extend it to you.
- Finding Credit Providers
Some lenders specialise in providing credit to people who have struggled with debt in the past, but they will be likely to only offer higher interest rates, which might become unmanageable, and land your business in hotter financial water. One alternative source of business credit could be a credit union. These are not-for-profit co-operatives, where members pool their resources to provide low-interest loans for their members. To join a credit union, and be eligible for a loan, you must apply to become a member. To be accepted, you must share some sort of common bond with other members – you might be part of the union’s local community, or members may work in the same sector for instance.
- Getting Credit after a Self-Employed IVA
A standard five year IVA will remain on your credit file for about one year after its completion. This means that in the months immediately following your IVA, accessing credit can still be difficult, although you no longer need to seek permission from your IP. There are plenty of steps you can take to begin rebuilding your credit, however:
- Ask for a Completion Certificate to prove you have completed your IVA
- Request a report of your credit file, and ensure all your details are correct
- Make sure you are registered on the electoral roll
- Pay all bills in full, and on time
- Consider using a credit-building credit card – ensuring to pay the balance in full each month
For more advice about whether a self-employed IVA is the right option for you, get in touch with one of Creditfix’s friendly advisors on 0808 2085 198.