Transport can be a difficult sector with low margins, volatile costs and high investment requirements for asset purchases so it is no surprise that they sometimes get into trouble.
If your transport business is facing difficulties then you may have heard about CVAs and wonder what they are and how they could help.
In this post, we explore these and look at how this could help your business survive and thrive.
What is a CVA?
A Creditors Voluntary Agreement (or CVA) is a formal method of agreeing to a payment plan on debts.
Typically a company that is essentially profitable but has historic debts or finds itself struggling to pay an expensive lease on premises, for example, may look to restructure and almost ‘reset’ its trading position.
For a transport business, this could easily be a lease that they are locked into on a yard or some expensive finance on rigs that they no longer need.
The business may have large historic debts that it simply can’t clear or loans with very high interest rates that are unserviceable for whatever reason.
In all of these cases, it is entirely possible that the underlying business is perfectly sound and the company could indeed carry on but for the extra burdens.
The business will probably spend a lot of time firefighting and speaking with creditors to keep the wolf from the door and this could certainly distract the directors from the day to day business of running a successful transport firm.
In the normal course of events, the creditors would eventually lose patience and apply to the courts for a winding up order. This would be a shame of course because it would mean an otherwise healthy business would be closed and all of the employees thrown out of work.
The law however allows for another less drastic solution that allows the directors to continue to run the business and the creditors to get a fair proportion of their money back and that solution is the CVA.
The directors of the business will call in a qualified insolvency practitioner (IP) who will guide them through the process and ensure that a CVA is a viable option. They will produce a plan in concert with the directors that is both workable and realistic and this would allow the company to pay back its indebtedness at a slower rate to the creditors, thus freeing up cashflow.
They may also speak with landlords and other creditors to renegotiate contracts to ease the cost of running the business.
When a plan has been agreed the IP will submit this to the court and call a creditors meeting. It is by no means certain that the proposal will be passed but if the IP has done their job effectively then all stakeholders will already be in agreement and the CVA will be passed.
After the meeting
Once the CVA has been passed at the meeting then the real work begins.
The company will have to stick strictly to the payment timetables set in the CVA and ensure that cash is handed over for distribution to the creditors in a timely manner. If they don’t stick to it then there is a very real likelihood that the creditors could seek to have the business liquidated.
A CVA will last for a finite period of time such as three years and will have a schedule that requires the business to make a payment every month or quarter for a percentage of the total value.
As long as the company maintains its payments and they are made on time then at the end of the term, the business will exit the CVA with no further commitment.
The benefits for a transport company
The first benefit to be felt by the directors of the company looking at the CVA process will be that the credit control calls will stop. Any issues like this will be referred to the IP in control and the directors will be free to work on making the business a success.
Part of that work will be planning for the future and with regular, structured payments cash flow forecasting becomes much easier.
If the business has been able to renegotiate a lease or be freed from expensive contracts then profitability should increase too, allowing the CVA payments to be much more affordable.
Once there is more certainty about the future there is a huge benefit for all concerned as a weight is most definitely lifted from their shoulders.
Overall the company will be in a much better place and in an ideal world this will be more profitable, better structured and less fraught with a clear plan of action and defined timeline for exiting the CVA.
In summary, a CVA can be a very good option for a struggling transport company however it is not suitable for every business in every situation and it can’t be done without the help of a qualified and experienced insolvency professional.
If your transport business is facing difficulties then get in touch now as early intervention gives you many more options.