Setting up as a sole trader opens in new window is one of the easier ways to start a business as there’s little in the way of paperwork, you have complete control over how you work, and you can keep all your profit after tax opens in new window.
However, as a sole trader, you are liable for any debts that your business incurs, which means your savings, home, and other possessions could be at risk from creditors.
Business debt can be caused by poor cash flow opens in new window, late customer payments, increased costs such as energy bills opens in new window, and lower customer spending as people reduce their outgoings.
It’s a good idea to act quickly when debts start mounting up as a sole trader or if there’s a chance that you are not able to pay debts when they’re due, such as suppliers opens in new window, loan repayments opens in new window, and professional fees.
Leaving debt to mount up and become unmanageable can be detrimental to your business, so it’s essential to seek professional financial advice opens in new window to understand the options available to help you manage it.
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As part of our Learn with Start Up Loans opens in new window partnership with The Open University, our online course is free to join, delivered by experts and includes a free statement of participation on completion.
Type of debt
The types of business debt a sole trader may face can be divided into priority and non-priority debts.
Priority business debts can include:
- business mortgage or rent payments opens in new window
- energy and utility bills
- business rates opens in new window
- National Insurance, VAT opens in new window, and income tax
- accountant payments
- bank loans opens in new window secured on assets
- any debt for which you have provided a personal guarantee.
These debts, if left unpaid, can cause severe problems for you and your business.
For example, if you are unable to pay debts to your energy providers opens in new window, they have the power to disconnect the power supply from your business premises, such as a workshop or garage.
You could also be taken to court for unpaid business rates and taxes, or even have your possessions taken to cover the amount you owe if your creditor obtains a court order.
Debts such as these should usually take priority over other forms of debt.
More information on what can happen if you don’t pay tax bills can be found at gov.uk opens in new window.
Non-priority business debts can include:
- overdrafts and business credit cards opens in new window
- non-essential business supplies such as stationery, computer accessories, cleaning product suppliers
- unsecured loans opens in new window.
Low-priority debts should usually be tackled after managing priority debts, as these tend to have less severe consequences if unpaid.
However, this doesn’t mean you should delay paying non-priority debts.
In all cases, it’s a good idea to seek immediate, professional financial advice if you are struggling with debt or finding it difficult to pay your bills.
Many options are available to help, from debt restructuring to entering into agreements with creditors to pay back a specific amount over time.
Debt options
If you are accumulating debt or unable to make debt payments, various debt options are available to sole traders.
1. Make a Full and Final Settlement Offer
A Full and Final Settlement Offer allows you to offer your creditors a lump sum of money – and it can be a reduced amount compared to the outstanding debt you owe, which they can either accept or decline.
If the offer is accepted, there shouldn’t be any further action, and you won’t owe your original debt.
For more information, visit National Debtline opens in new window.
2. Form an Informal Creditor Agreement
If you are facing a temporary financial issue and your debts are relatively low, you could form an Informal Creditor Agreement.
This agreement involves contacting your creditors and amending repayment terms, for example, making smaller payments over a more extended period or taking a payment break.
3. Agree on a Debt Management Plan (DMP)
Debt Management Plans are agreements made with creditors or through a licensed debt management company about paying your debt.
These agreements are typically made if you can only afford to pay back a small amount each month or you have debt problems but will be able to make repayments a few months down the line.
Using a debt management company, you will make payments to the company, which will then distribute the amount between your creditors.
As this is an informal arrangement, your creditors do not have to accept and can still chase you for your debt payments.
DMPs can be used for business and personal debts if you’re a sole trader, but secured debts such as a mortgage are typically excluded.
Head to gov.uk opens in new window for more information on DMPs.
4. Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement is similar to a Debt Management Plan but is a more formal arrangement.
It’s an agreement to pay all or part of your debts and uses an insolvency practitioner to divide your payments between your creditors.
Any outstanding debt after the length of the agreement is written off.
Personal and business debts opens in new window are included, and creditors will not be able to take further action against you over debts.
For further information, visit gov.uk opens in new window.
5. Use the Time to Pay Arrangement (HMRC)
A Time To Pay Arrangement is used for HMRC-related debts such as national insurance, tax opens in new window, VAT, or PAYE opens in new window.
These arrangements are based on your financial circumstances and are designed to be flexible and amended if circumstances change.
A Time To Pay Arrangement can consider penalties and interest, covering all outstanding debt you owe.
It typically involves repaying a regular amount until the debt is paid off.
The arrangement can be lengthened or reduced if your earnings or expenses increase.
Find more information at gov.uk opens in new window.
6. File for bankruptcy
Bankruptcy is usually a last resort when no other option is suitable.
If you declare bankruptcy your business and personal assets may be sold to pay off as much debt as possible.
You will also have to follow bankruptcy procedures.
A bankruptcy period tends to last a year but can stay on your credit rating opens in new window for some time afterwards, making it difficult to borrow money again or remain self-employed.
Find more information at gov.uk and National Debtline opens in new window.
Always seek professional financial advice from a qualified expert, such as an accountant opens in new window, if you face debt issues.
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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
