Guide to sole trader debt management

Setting up as a sole trader 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.

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, late customer payments, increased costs such as energy bills, 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, loan repayments, 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 to understand the options available to help you manage it.

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
• energy and utility bills
• business rates
• National Insurance, VAT, and income tax
• accountant payments
• bank loans 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, 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.

Non-priority business debts can include:

• overdrafts and business credit cards
• non-essential business supplies such as stationery, computer accessories, cleaning product suppliers
• unsecured loans.

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.

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 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 are included, and creditors will not be able to take further action against you over debts.

For further information, visit gov.uk.

5. Use the Time to Pay Arrangement (HMRC)

A Time To Pay Arrangement is used for HMRC-related debts such as national insurance, tax (for small businesses), VAT, or PAYE.

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.

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 for some time afterwards, making it difficult to borrow money again or remain self-employed.

Find more information at gov.uk and National Debtline.

Always seek professional financial advice from a qualified expert, such as an accountant, if you face debt issues.