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Commercial Debt and the Sole Trader

If you’re operating as a sole trader (rather than a limited company), it’s vital that you understand that there is no legal distinction between you as a person and your business.  This means that if your business is struggling to pay debts, you will ultimately be responsible for paying back the money owed from your own personal funds if you’re unable to make the payments through the profits of your business. 

Whilst launching as a sole trader is one of the easiest ways to start a business here in the UK, if your business is struggling financially (which is common for new businesses), then the financial repercussions this brings can have a seriously negative effect on your own personal finances.  You will be held personally liable for any debts that your business incurs, which means that keeping on top of your finances is essential, not just for your business, but for you as a person too.

If your business is going through a rough patch, then the sooner you deal with this, the better it will be.  Knowing what to do in times of financial crisis can be a challenge for any business owner and the actions you’ll need to take to improve the situation can seem complex. 

If your debts are reasonably small and likely to be temporary, you should contact your creditors directly and arrange to alter the terms of your repayment, if possible.  For example, you may arrange to make lower payments over a longer period of time (those this might result in paying higher amounts in interest).  Alternatively, perhaps you could arrange a payment break that would give you sufficient time to increase sales, or secure payments from late paying customers. 

In some instances, you may ask your creditors to accept a lump sum payment which is lower than the entire amount of your debt, but which they would accept as a final payment and close the debt thereafter.  Your creditors are not obliged to accept this offer, but if they do, then you may get a solicitor’s letter drawn up for you and your creditor to sign as an agreement that the payment settles the debt.

Late payments from your customers or clients often lead to cash flow problems, the bane of small businesses everywhere.  So many small businesses here in the UK become insolvent due to cash flow problems resulting from late-paying clients which is why the government is considering the introduction of a statutory requirement that companies pay their suppliers’ invoices within 30 days.  The government is aware that SMEs comprise a huge part of the UK economy and had hoped to address the issue of late payment with the Prompt Payment Code, but this has not been as effective as it was hoped.