What options do Sole Traders have when their business is not doing so well financially?

Many businesses are started by an individual as a sole trader business.  Some of these sole traders merge together and form partnerships, but as the business increased, so does their risk.

Unlike a limited company, if the business of a sole trader fails, the sole trader’s personal assets (and liabilities) are not excluded.

Sole trader businesses may take on larger contracts and may benefit from the larger revenues that these bring, but what happens if something goes wrong.  The contractor could go into liquidation, there could be disputes about the work causing delays in payment or refusal to pay, there could be claims for personal injury, the reasons go on and on.

The proprietor of the business (and the same applies to the partners of a partnership), needs to be honest and look at things realistically.  They need to ask themselves a few questions:-

1. Is it just a cash flow problem that will sort itself out in a few weeks/month? 

If this is the case, then they need to look at raising finance to bridge the gap, but they also need to consider the following questions.  

2. Are there creditors (people that the business owes money to) pressing for payment or threatening to take action?

If any creditors succeed in taking legal actions the outcome (if they are not paid) could be a County Court Judgement, or even worse, a winding-up petition could be presented against you.

Your credit score will be affected by either of these factors.

3. Is the financial problems as a result of a drop in sales or a lack of customers?

If this is due to a drop in sales, why has this happened?  If the business is in a declining market (such as the sale of CD’s being replaced by online downloads), it is unlikely to pick back up without diversification, innovation and change.  If it is as a result of a lack of sales or customers this may be turned around by the use of promotion and marketing, improving customer service or improving the appearance of the business premises or website.  Something needs to change. 

If it is due to circumstances out of your control, such as imposed restrictions due to Government policy (such as Covid 19 lockdowns), all you can do is hope these are not for a prolonged period of time and ensure that you are aware of any financial support that is offered.

4. Can the business cut its costs to make it more efficient?

Cut out any costs that are unnecessary.  If the business can do without certain assets, sell them.  If the business can trade from smaller cheaper premises, look at moving.  If there are excess staff, make redundancies.  Whilst this may seem like drastic action, in the long run it could save the business (and jobs).

5. Is the business able to trade profitably going forward?

If the answer is no, even if the changes are made, then the proprietor needs to look at cutting its losses now before they get worse.

So what options are available for a sole business that cannot pick itself up easily?

Sale

The sole trader may be able to sell its business, but it is unlikely that it would achieve any great price if it is not profitable and has financial problems. You also need to be realistic about how prosperous the business is.

Investor / Merger

Sometimes adding somebody into the business or merging two or more businesses together can make a better business.  Overheads are shared, there may be more skills and services/products that can be offered and the proprietors have support from more than one partner.  If the business is struggling, it may find that it does not have as much bargaining power as it would have liked and a merger would probably be more of a takeover.

IVA – Individual Voluntary Arrangement

If the business can make any necessary changes and trade profitably going forward, but is unable to take care of its current debts in a timely manner, then the sole trader could propose an individual voluntary arrangement to their entire creditors (including the business creditors).  This is where the business will continue and pay a (usually monthly) amount of money to an insolvency practitioner who is appointed to supervise the voluntary arrangement.  This money is to pay the historic creditors (from time to time when the money has built up) and the costs of the IVA.  After five years (this is the usual length, but may be less depending on circumstances), the sole trader is released from the IVA and the creditors will get their final share of the monies and write off the remaining debt to them.

Bankruptcy

This is where the sole trader is declared bankrupt.  This can be done by the (which they can declare themselves bankrupt themselves).  An Official Receiver is appointed to deal with the sole traders assets.  This will include their personal assets, such as their house. 

All the liabilities will go into the bankruptcy estate and will be written off when the bankruptcy estate has been dealt with and closed. 

There are some exceptions to assets and liabilities that will fall into the estate.  Tools of the trade will not be claimed into the bankruptcy estate and fines will not be written off, but remain payable.

Bankruptcy does have some restrictions about carrying on a business that may place some prohibitions on you.  However, a sole trader business is usually their trade and it is unlikely that a bankrupt would not be allowed to trade to earn a living (even whilst they are in bankruptcy, providing they follow the correct procedures).

It is hard for anybody who is worried about money to know who they can trust.  I’d love to lend you my ear and offer you some free, confidential and useful advice.  Just call Claire Foster on 01302 965485, or request a callback by filling in the form on our website.