Yes, you can start a business whilst in an IVA. Starting a business can be an exciting and rewarding endeavor, but it can also be challenging, especially if you’re already struggling with debt.
If you’re in an Individual Voluntary Arrangement (IVA), you may wonder if starting a business is even possible.
An IVA is a legally binding agreement between you and your creditors to pay back your debts over a set period of time. It can provide a way to manage your debts and get your finances back on track.
However, it can also limit your ability to start a business or take out credit. In this context, starting a business while in an IVA requires careful planning, as it may impact your IVA and your ability to pay back your debts.
In this article, we’ll explore some considerations and tips to help you navigate the process of starting a business while in an IVA
Can you start a business if you have an IVA?
Starting a business is a dream for many people, but for those in an Individual Voluntary Arrangement (IVA), it can seem like an impossible feat. An IVA is a formal agreement between you and your creditors to pay back your debts over a fixed period of time. It is designed to help you manage your debts and avoid bankruptcy.
However, starting a business while in an IVA can be challenging, as it may impact your ability to make the agreed-upon payments to your creditors. It is essential to understand the terms and conditions of your IVA, as well as the potential impact of starting a business on your financial situation.
While it is possible to start a business while in an IVA, it requires careful planning, preparation, and consultation with your insolvency practitioner to ensure that you do not breach the terms of your IVA or compromise your ability to pay back your debts.
Types of trading styles while you are in an IVA
There are a number of different trading styles for your business you can choose while you are in an IVA.
Self-employment
Starting a business as a sole trader while in an IVA is possible, but it’s advisable to gather evidence first that your business generates enough income to cover your IVA payments. IVAs were designed with the self-employed and businesses in mind, and they can be adjusted to reflect changes in income. To ensure this, you must communicate with your Insolvency Practitioner (IP) and prepare a cash-flow statement to predict income changes.
When starting a business during an IVA, you’ll need to provide proof of income generation, including cash flow statements, business accounts, and personal tax returns. Before making any employment or financial changes, communicate with your IP to advise on what’s possible for your circumstances.
Additionally, if you’re self-employed and in debt through a business account, you might be able to keep the account to cover running costs, but if it’s very overdrawn, include it in your IVA agreement. Finally, debts owed to HMRC can be included in your IVA.
If you are self-employed, you can still engage into an IVA, but there are some important distinctions to consider.
- Flexible Contributions
If you work for yourself, your monthly income is more likely to be erratic than if you work for a company. As a result, the amount you pay towards your IVA may be more variable. You must compile a cash-flow statement to inform your Insolvency Practitioner (IP) about how much your income swings from month to month.
Self-employed IVAs are meant to account for this, and you may wind up raising or decreasing your payments throughout the duration of the IVA. This is perfectly fine as long as you maintain in touch with your IP and inform them of any changes in your circumstances so that payments can be adjusted.
- Business-Related Credit
Being in an IVA, understandably, limits your access to financing. When a self-employed person joins into an IVA, things can be a little more flexible. You will still need your IP’s consent to borrow more than £500 in credit, but you may be able to exempt one line of business credit from your IVA and repay it separately to maintain your working relationship.
- Business Bank Accounts
If your business account is overdrawn and you require this line of credit to cover your company’s operating expenses, you may be eligible to keep the account. But, if it is significantly overdrawn, it may be more prudent to incorporate it in your IVA arrangement.
Furthermore, if you have additional lines of credit with the same bank, such as a business loan, the bank may use the ‘right to offset’. This means that they may confiscate funds deposited into your business account in order to offset your other debts. If there is a risk, it is normally advisable to open a new business account and include the old one in your IVA.
Starting a Limited Company
Starting a limited company while in an IVA can be a complex process that requires careful consideration of the implications on your IVA agreement. One of the key things to consider is how the new business will affect your ability to make the agreed monthly payments towards your IVA. As a director of a limited company, you may be able to take a salary from the business, which could affect your IVA payments. Therefore, it is important to speak with your Insolvency Practitioner (IP) to ensure that the business is viable and that the payments you make towards your IVA are sustainable.
Another consideration when starting a limited company while in an IVA is the impact that the business will have on your personal credit score. As a director of a limited company, you may need to obtain credit to help finance the business, such as a business loan or credit line. However, any new credit you take on could affect your IVA agreement and impact your ability to meet the agreed monthly payments. It is important to speak with your IP to understand how any new credit you obtain will impact your IVA agreement and to ensure that you are able to meet the terms of the agreement while running your new business.
Self-employed IVAs and your Assets
One significant advantage of IVAs over bankruptcy is that you will be able to keep your assets, including your home if you are a homeowner. In the vast majority of circumstances, you can maintain all of your assets with a self-employed IVA, but there are a few exceptions to consider.
IVAs were originally developed with business owners in mind, so it stands to reason that this method of debt repayment affects operations considerably less than bankruptcy would. Yet, there may be times when a few assets must be sold.
Business-related Assets
If your business continues to operate, your creditors are likely to get a considerably better return on their investment. Of course, you will need to keep the tools, equipment, cars, or technology linked with the firm in order for this to happen, and you will not be obliged to give up any of these assets. In some situations, you may be required to exchange highly valuable work-related assets for less expensive ones and pay the difference towards your IVA.
For example, if your job needs you to travel and you own a valuable luxury car, you may be asked to trade it in for a more practical, low-cost option. Even if you are requested to replace a company-related asset or to, you will never be asked to sacrifice something that is essential to the operation of your organisation.
Personal Assets
As previously stated, IVAs safeguard your assets. In rare situations, you may be required to sell a high-value automobile. But, if you can demonstrate that the vehicle is required for your job, which is likely if you are self-employed, you will be entitled to keep it, or at least a less expensive model.
If you own a low-value car, you will most likely not be requested to sell it even if it is not required for your job, because your creditors would be unlikely to benefit from its sale by the time administrative fees were covered.
Read more: Pro’s & Con’s of an IVA
Frequently asked questions
Yes, you can start a business while in an IVA. However, you will need to prove that your income will generate enough business for the agreed IVA payments. As well as your cash flow statement, you will need to provide business accounts and your personal tax returns as proof. If you have already started an IVA and are thinking about leaving your current employment to start a new business as a sole trader, it may be difficult to provide the evidence for your IP that your business can support your income requirements. It is important to communicate with your IP before making any changes to your employment and financial affairs, including starting your own business as a sole trader, as they can advise you on what is possible in your personal circumstances.
It is possible that your IVA may affect your ability to obtain financing for your new business, as it will be listed on your credit file. However, there are alternative financing options available, such as crowdfunding or peer-to-peer lending. It is important to research and explore all your options thoroughly before making any decisions.
Yes, you can keep the profits from your business while in an IVA. However, you may be required to increase your IVA payments if your income increases significantly. It is important to keep your IP informed of any changes in your income and business so that they can make any necessary adjustments to your IVA payments. Can I start a business while in an IVA?
Will my IVA affect my ability to obtain financing for my new business?
Can I keep the profits from my business while in an IVA?
Conclusion
Starting a business while in an IVA can be challenging, but it is not impossible. One of the benefits of doing so is that you can use the income generated by your business to pay your IVA payments, reducing the risk of defaulting on your agreement. By making regular payments, you can improve your credit rating and increase the likelihood of obtaining future credit.
Additionally, starting a business can provide you with a sense of independence and financial stability, helping you move towards a more secure financial future.
However, it is important to note that starting a business can be risky and may impact your IVA payments. Therefore, it is essential to communicate with your Insolvency Practitioner (IP) and seek their advice before making any changes to your employment and financial affairs.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.