A guide to Individual Voluntary Arrangement
No one said life as a freelancer was easy. Running your own business and making sure payments to suppliers are made on time while also managing your household bills and any personal debts you have can be a complicated juggling act.
One of the benefits of operating as a private limited company is that there is a legal separation between the finances of the business and your personal finances. That can provide the peace of mind that, should the business fail, only the money you have personally invested in the business will be at risk. However, for freelancers operating as a sole trader, there is no such protection.
The personal and business finances of a sole trader are one and the same. That means, if your business starts to struggle financially, your creditors can seek repayment for bills your business is unable to pay from you personally. As well as your livelihood, that means your house, car and any other assets could be at risk. Here Mike Smith, senior director of Company Debt, highlights what an IVA is and how it can help you and your business.
Introducing the IVA
The individual voluntary arrangement or IVA is a process that can help to make sure a sticky situation does not turn into a financial catastrophe for you and your business. Used in the right way, it can help you keep your business running by giving you the time and space you need away from constant creditor pressure to repay your debts.
What is an IVA?
An IVA is a formal agreement with your creditors to repay some (up to 70 per cent of your debts can be written off) or all of your debts over a period of time, typically five years. You agree to make a regular payment to an insolvency practitioner who distributes the money between your creditors. For an IVA to be accepted, 75 per cent of your creditors by the value of debt must agree to the proposals.
As long as all of the IVA payments are made on time then your creditors can no longer take legal action against you to recover the debts. All interest and charges on unsecured debts are also frozen. At the end of the agreed term, all the debts included in the IVA will be written off.
One of the biggest benefits of an IVA is that as a business owner, you will be able to continue trading while the IVA is active so you have the chance to trade your way out of trouble. The IVA is also not announced publicly, which means clients, customers and other business stakeholders you are not indebted to will not know you’re in trouble.
What’s the difference between IVAs for the employed and self-employed?
IVAs can be used by both employed and self-employed individuals who are struggling to repay their debts. In essence, the process for both parties is very similar, but there are some small differences that can benefit freelancers.
Business credit – An employed person in an IVA is required to obtain permission from their insolvency practitioner (the professional who arranges and monitors the arrangement) to access credit of more than £500. In the case of a self-employed person, they will usually be allowed to access ongoing business credit facilities so they can continue to run their business. However, this will have to be agreed with the creditors and will usually require all invoices to be paid within 30 days or sooner, depending on the invoice terms.
The exclusion of trade creditors – If the ongoing supply of goods or services from an unsecured creditor is vital to the survival of the business then that particular creditor may be excluded from the IVA. That’s due to the fact that their inclusion in the IVA could damage the ongoing business relationship and cause them to withdraw their services. Instead, ongoing payments can be made towards these debts outside of the IVA. However, this should be considered carefully as excluded creditors can still add interest to their debt and take legal action against you.
Seasonality – Many freelancers have a degree of seasonality in their business and their income. IVAs for the self-employed often allow some flexibility when it comes to calculating realistic monthly payments, with some freelancers allowed to repay more or less in particular months.
Who qualifies for an IVA?
For an IVA to be an option for you and your business, you must meet the following minimum criteria:
- The value of your debt must be at least £5,000
- You must owe money to two creditors or more
- There should be signs that you are struggling to make your payments
- You must live in England or Wales
While no business owner wants to be in a position where they’re considering an IVA, in certain circumstances, it could provide the lifeline to get your business back on track away from constant creditor pressure.
27th September 2018