Suffering with debt, with the added stress of running your own business, is such an overwhelming experience. You feel you have to function, so that your company can continue to trade, but the worry eats you up from within. The first thing to know is, there are lots of ways to help, and you definitely don’t have to lose your business.
If you’re considering whether an Individual Voluntary Arrangement (IVA) is worthwhile as a solution to unmanageable debt, you’ll want to know how it will affect your business. An IVA is a government-mandated solution to debt, which allows you to pay off a small, affordable percentage of your debt monthly, and have the rest written off. The best thing about an IVA is, it allows you to keep your business trading.
One thing is for sure, you must not keep ignoring your debt and your creditors. Unfortunately, debt collection companies will continue to contact you for money. Although you can’t go to prison in the UK for being unable to afford your debts, they may take you to court, and you could lose valuable assets, such as your home.
In this article, we’ll cover exactly how an IVA will affect your business, how to manage getting a business bank account with an IVA, and what to do if your financial situation changes on an IVA.
Will an IVA affect my business?
An IVA will affect your business if you’re self-employed, by allowing you to keep trading while you pay off an affordable percentage of your debt.
If you’re the director of a limited company, an IVA will allow you to keep your position and income, while dealing with your personal debts.
How an IVA can help if you’re self-employed
You’ll be pleased to know that IVAs were actually designed to help self-employed people. An IVA can help you keep a business, which might otherwise have been lost due to bankruptcy, running, and gives it the chance to flourish and become profitable again. Before we go any further into how IVAs can help you if you’re self-employed, let’s do a quick overview of what an IVA is.
Quick reminder: what is an IVA?
An IVA is a formal way to deal with your insolvency (inability to reasonably pay debts that are owed), and helps you write off your debt after a period of five years. You’ll get an Insolvency Practitioner (IP) who will look through your debts, and work out the amount that you can reasonably repay. You’ll pay this either monthly or in a lump sum, leaving aside enough for your essential living expenses. If you’re paying money into your IVA in instalments rather than as a lump sum, you’ll only have to make a single payment per month, and this will be divided fairly among your creditors. You also get legal protection from your creditors, and they will not be allowed to contact you to demand repayments. After the IVA is discharged (ended), the rest of your debts will be written off. Companies like IVA Advice offer free advice on IVAs.
As you know, if you’re self-employed, your personal finances and your business finances are mixed up together. This makes struggling with debt especially tough, as the law considers your business debts to be the same as your personal debts (there is no limited liability, as with limited companies). Before IVAs, if your debts were serious enough you’d have to go bankrupt, which would stop your business from trading.
Getting an IVA (if you’re self-employed, you’ll be getting what’s called a ‘self-employed IVA’), means that you can continue trading, while making repayments that you can afford to your creditors. Rather than being forced to pay the full amount of your debt, or losing everything in bankruptcy, you can keep your business and allow it to flourish. If you owe money to HMRC, these debts can be included and paid off in a manageable way in an IVA, which makes an IVA particularly helpful for sole traders.
Usually, if your business is making a profit, your creditors will have no problem accepting your self-employed IVA. This is because they will receive more money from you, despite your reduced debt payments, than if you were to go bankrupt, or they attempted to take you to court (don’t worry, you can’t go to prison in the UK for being unable to pay your debts). However, if your business isn’t making a profit, your creditors may ask you to seek other forms of employment, so that you can pay more into your IVA, and they make more money back.
When you set up a self-employed IVA, your Insolvency Practitioner (IP) will look at both your business debts and personal debts, and set up a cash flow forecast for your business, and your income and outgoings. This will help prove to your creditors that your business is viable, and can sustain IVA repayments. Self-employed IVAs acknowledge that income fluctuates when someone is self-employed, so they will add this flexibility to the IVA, helping you successfully stick to it. At the end of your self-employed IVA, your debts should be cleared and you’ll be left with a viable business.
Self-employed IVAs also have the benefit of being more flexible when it comes to credit. IVAs usually don’t let you take out more than £500, but if you need more credit to run a profitable business, you can likely take this out, if you can prove that you need it for your business to be viable. However, you may find it hard to get a loan with decent interest rates on an IVA, and you’ll have to be doubly sure that your business profits will cover the loan.
Unlike bankruptcy, you can continue to be the director of a limited company while you have an IVA. As you and the company are legally separate entities, your personal finances and the finances of the company should not affect each other in terms of debt (unless you have personally guaranteed any of the company’s debts).
Getting an IVA can be useful for helping you deal with your personal debts while you continue to run a business and gain an income. However, some companies do have a rule where, if someone enters into an IVA during their employment, this is grounds for dismissal, so if you’re a director of a company like this, you couldn’t carry on in your role. Make sure you check your employment contract carefully before you enter into an IVA. However, if you are in serious personal debt, the other insolvency options such as bankruptcy would also stop you from being the director of a limited company, so an IVA may still be the best option for you, depending on your circumstances. An IVA also cannot stop you from becoming the director of another limited company, even if your former company forbids you from doing so.
While your debts and a company’s debts are usually legally separate if you’re the director of a limited company, this isn’t the case if you’ve personally guaranteed any of the company’s loans. A personal guarantee is a legal promise to repay a loan given to a company, if the company cannot pay it. So, if you’ve personally guaranteed a loan, you become personally responsible to pay it if the company cannot pay it.
If you’re the director of a limited company and you’re asked to pay up for debts you’ve personally guaranteed (this would likely only happen if the company was seriously late or defaulted on debt payments), you can put these in an IVA. This means you would only have to pay off a percentage of the debt that you could afford in monthly instalments or a lump sum and after the duration of the IVA (usually 5 years), the remainder of your debt will be canceled.
How will an IVA affect my current business bank account?
You’ll have to carefully manage your business bank accounts if you enter into an IVA, whether you are a sole trader or you’re the director of a limited company.
If you’re self-employed and you owe money to your bank, you can include these debts in your IVA. Doing this means that you’ll pay off a small percentage of the debt you owe to your bank into your IVA every month, and after the IVA is over, the debt will be written off, no matter how much you still owe.
However, if you include debts to your bank in your IVA, the best thing to do is open a new bank account. This will stop the bank you owe money to calling in their ‘right to offset’ rule, which means that, if you owe money to one account, they have the right to take money from your other accounts to pay it.
When you open a new bank account, make sure it is with a bank that is entirely unrelated to the one you owe money to. Even banks within the same Banking Group can exercise the right to take money from one of your accounts to pay another in arrears, so make sure you choose a bank in an entirely different Banking Group.
HSBC banking group won’t usually allow you to open an account with them if you are in an IVA, so it’s best not to try this banking group if you need to open a new account.
Accessing credit with your new bank account may be difficult, though, particularly as an IVA and previously late payments or defaults will negatively impact your credit score. You may only be able to get a Basic Account if you have an IVA, which won’t include an overdraft, and will just allow you to deposit money and pay into your IVA. However, if you’re considering an IVA you likely already have a poor credit score and may have trouble getting new credit anyway. It is better to stop taking out new credit at all when you have serious debts, as this will only worsen the situation, and stop you successfully completing your IVA and avoiding bankruptcy.
However, there are situations, as a business owner, when it is necessary to use credit to run your business. When you’re setting up your self-employed IVA, it might be possible to exclude a line of credit — for example, a business bank account or business credit card — if you can prove that you would lose your income without it. However, you’d have to let all your other creditors know, when drawing up the terms of the IVA, and they’re only likely to agree to it if they realise the IVA wouldn’t happen without it, and therefore that they would be repaid less money. Also, if the bank account of business credit card is very overdrawn, it is probably wise to include it in your IVA, anyway. Otherwise, you would have to commit to paying off the balance each month, and you may not have the funds to do so.
Having an IVA shouldn’t affect a limited company bank account, as you and the limited company are considered separate in the eyes of the law. However, if your personal bank accounts and the company’s accounts are at the same bank, this could cause difficulty. If you include money you owe to your bank in your IVA, the company account will also be notified. Once the bank knows you have financial difficulties, they might consider your company to also be at financial risk, and may reduce or remove credit facilities to protect themselves from non-repayment.
Can I get a business bank account with an IVA?
Whether you’re a sole trader, in a partnership or the director of a limited company, you’ll likely need a business bank account to successfully run your business. The only exception to this rule, is if you’re a sole trader with very limited activity. However, if you owe money to your bank and you include these debts in your IVA, you’ll need to open another business bank account at another branch. This is because, as we mentioned before, the bank might exercise their right to offset, and take any money that comes into your business account to pay off your debts to the same bank.
This raises another issue — the fact that it is hard to get accepted for a business bank account if you have an IVA. An IVA will impact your credit score long-term (until the IVA ends after five years), which will in turn affect your ability to get approved for a loan. If you’re the director of a limited company, many banks will still require you to pass a credit check before they approve you for a business bank account, even though you and the company are legally separate entities. But don’t worry, we’ve done our research and put together some solutions for getting a business bank account with an IVA.
Go for online business bank accounts with no credit checks
There are many legitimate online business bank accounts springing up now, and many have the features of a traditional business bank account. The best thing about these online accounts is that they don’t involve credit checks, and so they may be your best bet for opening a business bank account with an IVA. We’ve searched all over the web, and found the best digital bank accounts with no credit checks:
ANNA Business Bank Account
The ANNA Business Bank Account is really useful if you have an IVA, as it has no credit checks and offers guaranteed acceptance. ANNA’s business accounts are app-based, and come with a debit Mastercard, which you’ll get within five days. You’ll also get free banking for six months, and then you’ll be charged £0 – £19.90 per month, depending on how big your business is. ANNA Business Bank Account has no transaction or ATM fees and offers free Direct Debits and free transfers. However, there is no overdraft and no chequebook is provided.
Neat UK & European Business Account is another great option for a business account if you have an IVA. Like ANNA Business Bank Account, it includes no credit checks and offers guaranteed acceptance. You can open your account quickly and for free, and it comes with a Neat prepaid debit Mastercard. You can receive payments from your customers and e-commerce platforms, for example, via Amazon and PayPal. Neat also offers worldwide bank transfers. However, there is a 2% ATM withdrawal fee, and no cheque book with a Neat UK & European Business Account.
Bunq offer an app based business account called the easyMoney Business Account. This business bank account is available to UK business owners. Bunq is particularly useful to business owners because each business bank account can have up to 25 ‘sub-accounts’. Each ‘sub-account’ has its own IBAN number, which means you can use it for direct debits and online payments, as well as accessing it with your debt cards. This gives you an immediate overview of your finances, and helps you keep track of them. Bunq have a €9.99 – €-19.99 monthly fee, depending on how many sub-accounts you use. You also get three cards to choose from — Mastercard debit, Maestro and Mastercard Travel credit card. There is no overdraft.
Cashplus Business Bank Account is also a good choice if you want to open a business bank account with an IVA. Cashplus Business Bank Account offers all the features of a regular business bank account, including online payments, transfers, direct debits and standing orders. Cashplus don’t ask for any credit checks and offer guaranteed acceptance. You’ll get a business prepaid Mastercard debit card with a Cashplus Business Bank Account, and you’ll pay a relatively low fee of £69 a year. However, you won’t be able to deposit cheques.
The Tide e-money Business Account, with its low transaction fees and zero monthly, annual or application fees, is a strong option if you want to open a business bank account, but you have an IVA. The Tide e-money Business Account is offered by Prepay solutions (PPS). Prepay solutions are an electronic money issuer, rather than a bank, but they are authorised by the Financial Conduct Authority (FCA). A Tide e-money Business Account doesn’t perform any credit checks, and you can open an account within minutes. You’ll get a Tide contactless business Mastercard debit card. However, as you can only access the web version of your account through access to your phone, if you lose your phone this could be an issue. The Tide e-money Business Account doesn’t have an overdraft facility, although it does offer credit subject to certain requirements.
Traditional bank accounts
If you still want to get a traditional business bank account, there are a few options for people with a poor credit history (which you are likely to have if you have an IVA). These are:
To increase your chances of getting approved for a business bank account at a high street bank, make sure you:
- Create a solid business plan, with firm financial forecasts. Show your predicted income and expenditure, so that when you meet with a business advisor at a high street bank to discuss opening a business bank account, you’ll be able to prove that your business is or will be viable.
- Check your credit history. Make sure that details such as your current and previous addresses, name, date of birth and other bank account details are correct. If even one of these details is wrong, it can lead to you being refused for a business bank account.
- Get on the electoral roll at your current address. If you’re not registered on the electoral roll and the bank does a check, you’ll find it nearly impossible to get approved for a business bank account.
- Make sure your company is registered with HMRC (you should do this within three months of trading, anyway).
Getting a business loan with an IVA
Just as it is difficult to get a business bank account with an IVA, it’s also difficult to get a decent loan with good interest terms. Credit scores (your record of paying — or not paying — your debts on time), both personal and business, are largely what creditors look at to approve loans.
An IVA causes a dip in your personal credit score, and if you’re a sole trader running your own business, your personal credit score is one and the same as your business credit score. You may find it easier as the director of a limited company to get a business loan, as long as the limited company has a good business credit score and a history of repaying debts on time. However, if you’re hoping to start a limited business with an IVA, and the company has no credit history, creditors may look at your personal credit history, which may affect you getting a business loan.
The impact of an IVA on your credit score makes running or starting a business particularly tricky, as many businesses wouldn’t exist without lines of credit, for example, business credit cards or personal loans. However, if you have an IVA, getting a loan of any kind may not be the best idea. Taking on more debt just as you’re trying to get out of large amounts of debt could put you in a much worse financial situation. You may end up going bankrupt, and then you would definitely lose your business, unlike an IVA, which allows you to keep it.
However, as we mentioned above, you may be able to get around the £500 limit on credit in an IVA if you can prove to your IP that you can’t run a viable business without a certain line of credit. While you will find it hard to get approved for a traditional business loan with the damaged credit score that comes with an IVA, there are still options you can consider. Let’s look at them now:
Business loans designed for a poor credit score
- Business credit cards: These give you access to funds you might need to run a business, and improve your business credit score if you pay them back on time. As business credit cards have higher interest rates, especially if you have previous debt or you have an IVA, you should use them for paying for small amounts that you can pay off quickly. So, if your IP gives you permission to use a business credit card, you need to make absolute sure that you can manage the repayments, or. your IVA could fail and you could end up going bankrupt.
- Credit unions: You may be able to access business credit from a credit union. These are non-for-profit organisations, where members put together their savings and resources and provide low-interest loans for their members. You must be a member of a credit union to be considered for a loan, and you must have a business venture in keeping with the union’s interests or concerns. You can find credit unions for bad credit here.
- Angel investors: an angel investor (otherwise known as a private investor, seed investor or angel funder) is someone who provides financial backing for small startups or entrepreneurs, in exchange for becoming a stakeholder in the company. Sometimes the angel investor might be a family member or fried. Check out the Angel Investment network for more information on angel investors.
My financial situation has changed on an IVA
If you own your own business, your IP will be aware (and expect) your income to change month to month. In fact, self-employed IVAs are deliberately set up to acknowledge the ebb and flow of income during self-employment. But if your income goes up or down drastically (for example, you can no longer afford your IVA repayments, or you receive an unexpected bonus), you’ll have to tell your IP, and discuss next steps.
What if I can’t make my IVA repayments?
If you can’t manage your IVA repayments, perhaps because your business is seriously struggling, make sure you tell your IP immediately. You may be able to negotiate for lower payments, and therefore keep your IVA. If your IVA was made under the IVA protocol, your IP is allowed to reduce your monthly payments by up to 15% without having to ask your creditors’ permission.
In some circumstances, where you’re unable to manage both your IVA repayments and your daily living expenses, your IP may be able to arrange a payment break. Payment breaks are usually for short-term financial emergencies, for example, if your boiler breaks and you can’t afford to make repayments and pay for repairs.
What if my income increases?
If your income increases, for example, because your business is doing unexpectedly well or you inherit money, you must tell your IP. As your IP carries out an yearly review of your finances, and may have the right to access your bank account, they will find out, anyway. Hiding money from an IVA is a fraud and criminal offense.
Your IVA may have something called a ‘windfall clause’. This is money that you receive unexpectedly during an IVA, for example, a large inheritance. If your IVA has this clause, you will have to pay the money into your IVA.
When it comes to overtime pay, you only need to tell your IP if the amount you receive is more than 10% of your normal take home pay. If you receive over 10%, you’ll only need to pay half of this into your IVA.
Can an IVA take my tax refund?
If you have overpaid tax and HMRC send you a tax rebate in the same tax year, you’re allowed to keep it. However, tax in the past 4 years that is recovered from HMRC and returned to you has to go to your IVA and your creditors, who are legally entitled to these funds.
Can I start a business whilst in an IVA?
We’ve covered how an IVA will affect your existing business, but what about starting a new one? You are free to start your own business while you’re in an IVA. However, have to agree any changes to your financial situation with your IP, and prove that your business can support you.
While you can start your own business as a sole trader if you have an IVA, you’ll need to gather evidence that your business is making enough profit to support your income requirements, including your IVA. You’ll have to prepare a cash flow statement, so that your IP can forecast your income, and how much it will fluctuate each month. You’ll also need to provide business accounts and personal tax returns as proof. If you have only just started a new business and haven’t yet entered into an IVA, it might be wise to delay your application for an IVA until your business generates enough income to prove that it can support you.
If you’ve already entered into an IVA and you decide to go into business as a sole trader, you might not have enough evidence to prove to your IP that your business generates enough income to support you. In this case, it may be difficult to start a business while in an IVA, as your IP is unlikely to approve such a big financial change without evidence that you can make your IVA repayments. However, if you’re already employed somewhere else, and you want to start a business on the side, this shouldn’t be a problem for your IVA, although if your income increases, you may have to pay more into your IVA.
Starting a Limited Company
Similarly to being a sole trader, if you start out as the director of a limited company and you have an IVA, you will need to prove to your IP that the limited company generates enough income to cover your IVA payments. If the limited company hasn’t generated enough income history to prove that it is viable, you may find it hard to get your IP to approve this change.
You should always check with your IP before making any changes to your employment and financial affairs. The most vital thing is to stick to your IVA, and pay it off properly. This will give you a truly fresh start, and avoid all the pitfalls of bankruptcy.
Should I go into a Partnership Voluntary Arrangement (PVA)?
If you’re in a business partnership and you owe a lot of debt, you might want to consider a Partnership Voluntary Arrangement (PVA). PVAs differ from IVAs, in that they’re designed for business partnerships, rather than sole traders or ordinary employed people. A PVA is essentially the final step on the road before you or your business partner become bankrupt, and your partnership gets dissolved. Like an IVA for sole traders, a PVA can help an insolvent business partnership to keep trading, and recover financially. You’ll pay your business debts off in a single, affordable payment per month and, after five years, the rest of your debt gets written off.
However, PVAs are only likely to be approved if your partnership is still viable, or has capital tied up in valuable assets, that can be released to free up cash flow. If your business partnership is leaking money, you may be financially better off ceasing trade. You can still get an IVA alongside a PVA, and this will be helpful if you’re being chased personally for debts from your partnership, as it gives you legal protection against creditors. Also, having an IVA protects your personal assets from the partnership’s creditors.
Now that we’ve covered all the details of how an IVA will affect your business, we hope you’ve found it a useful and informative read. Debt can feel unbelievably stressful, and unfortunately debt collection companies capitalise on this, and make you feel like they have much more power than they do. However, as soon as you take action on your debt, whether through an IVA or another debt solution, you’ll feel much more in control of your life and your business.