A company voluntary arrangement can often be seen as a red flag when deciding whether to do business with a particular organisation, particularly if doing business would involve extending any sort of line of credit to them.
But it doesn’t have to be seen as such; in many cases, a company that has entered into a CVA is better placed to undertake new obligations than a struggling firm (often called a ‘zombie company’) that is in financial difficulty but has not yet taken any action to recover its position.
When an organisation is in difficulty, but has not done anything about it, you’re faced with a slow-burning fuse before the company’s finances implode entirely; and, like a dud firework, you should exercise caution before getting too close.
In contrast, a proactive company that has entered into a CVA often represents not a dud, but a different kind of slow-burner – one whose fuse is burning down to a much more positive outcome.
For example, a CVA can agree a manageable repayment plan for any existing debts, rather than the company continuing to try and meet all of its monthly obligations with insufficient cash flow.
The plan might last one or several years, and could include almost any portion of the outstanding debt – from all of it, to a small fraction – being repaid to the pre-existing creditors.
As a new supplier to the firm, you might reasonably want to check its credit rating; however, in the case of a CVA, the company will not have a credit rating at all, either good or bad.
To avoid ‘going in dark’ when considering a supplier agreement with a CVA-affected firm, ask yourself several simple questions:
- What circumstances led to the CVA being entered into?
- How long has the company been in a CVA, and how long is left to run?
- Has the company traded well since entering into the CVA?
- Is it matching the forecasts against which the CVA proposal was drawn up?
Like any other company, positive performance should be rewarded with greater willingness to enter into a supplier agreement, and potentially with a higher credit limit too.
But unlike other companies, with a firm affected by a CVA, the decision of whether to say ‘yay’ or ‘nay’ will have to be based on your own research, rather than an external credit rating.