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Company debt help for directors and sole traders

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Updated: 9th March 2020

Business Debt Advice for company directors and sole traders

For many small businesses, particularly those in their early stages, it is almost inevitable that some form of lending will need to be taken out at some point. This could be to get the business off the ground in the first place, to purchase machinery or equipment to increase output, or to fund an expansion project. Handled correctly, debt is not always a bad thing. However, if your small business is continuing to accrue debts and you feel these are getting out of hand you should take steps to rectify the situation as soon as possible.

How you operate your business will determine how you should tackle any debts and the ramifications on you personally should these get out of control. The advice in this article relates to limited company debts; if you are a sole trader, skip down the sole trader section towards the end of this piece for further help and advice.

Understanding limited liability

When setting up a business, you can choose to operate as a sole trader, or to incorporate your business as a limited company. Both options have pros and cons; however, the main benefit of trading through a limited company is that you can take advantage of what is known as limited liability. Limited liability is a layer of protection placed between the company and the company director. This keeps the two entities separate and ensures that a director will not be held financially responsible for the debts of their company.

While limited liability does provide company directors with a valuable layer of security, there are certain instances where this does not protect directors against liability for company debts. The most common exception is when a director signs a personal guarantee in order to obtain funding. Should the company be unable to keep up with the repayments on this borrowing, the responsibility shifts to the director, who must pay this debt from his or her personal finances. Other instances where the director will be personally liable are those where the director is guilty of wrongful trading, or where the debt has been accumulated through fraudulent means.

The importance of cash flow

When your business is experiencing financial issues, typically one of the earliest ways you will see this manifest itself is with problems regarding your company’s cash flow. Cash flow is the lifeblood of a business, and without a steady stream of money coming in order to ensure money can go out on time to pay bills and other creditors, a business can quickly run into serious difficulties.

Once a creditor becomes aware of your company’s problems, you may find they take steps to limit their exposure to you and protect their own business. This could take many forms, such as revising their payment terms, requesting a deposit before supplying goods, or even refusing to engage in further business with your company. If this happens with a key supplier, or a customer responsible for a large portion of your total sales, this removal of service could have a devastating effect on your business and could even see you unable to continue trading.

If your business is losing money, the first thing you should do is try and cut costs wherever possible. This may involve simple things such as switching your utility bills to cheaper providers, while more significant savings can be made through negotiating with your suppliers for reduced rates, and even seeing whether your landlord will agree to reduce your monthly rent. When cutting costs, however, you should be careful not to jeopardise your business in the process; while you may be able to find a cheaper supplier for instance, if the quality of goods they provide is sub-standard, you risk losing customers and ruining your reputation. Likewise, a cheaper courier may save you money, but you need to be sure they can deliver your product on time and undamaged.

Finance options

If your cash flow is suffering and you have exhausted all means of cutting costs, you may need to look at raising additional funds. If this is something you want to consider, there are various finance options available which could help get your business back on track. These could include a short-term loan to tide you over until the situation improves, invoice financing which allows you to release a percentage of the money you have tied up in unpaid invoices, or a specialised business overdraft to help you deal with unexpected drops in your cash flow.

However, it is important to note that taking out further borrowing should only be considered if you believe your current problems to be temporary. If you simply need a financial cushion to help you trade your way out of difficulty then these options can really help. However, if you know that your situation is unlikely to improve, and the additional finance will merely allow you to stay afloat for another couple of months before you find yourself back in the same position, you should steer clear of going down this route.

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Restructuring options

  • Time to Pay (TTP)

Depending on the scale of your problems, it may be possible for you to look at restructuring your debts to make things more manageable for you. If you have fallen behind on your tax obligations, you may wish to consider negotiating a Time to Pay (TTP) arrangement with HMRC. As the name suggests, this would give you additional time to being your account up to date by allowing you to pay off your tax debts through a series of affordable monthly instalments. Even though this may sound a good solution to your problems, HMRC are under no obligation to agree to a proposed TTP.

Should HMRC have any doubt as to the viability of your company going forwards, they are likely to reject your offer and refuse to enter into further discussion. Those companies who have a good track record with HMRC of paying their tax on time have a significantly higher likelihood of being able to come to some agreement as to the outstanding debt. 

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  • Company Voluntary Arrangement (CVA)

If you are dealing with more than just HMRC debts, perhaps owing money to banks, suppliers, and other creditors, you may be better off considering a Company Voluntary Arrangement (CVA). A CVA allows your company to restructure its liabilities by entering into an agreement with its outstanding creditors. A CVA is not appropriate for every company in debt; just like with a TTP arrangement, you must be able to demonstrate that your company has a high chance of a successful and profitable future. A CVA must be drawn up and administered by a licensed insolvency practitioner, and your creditors must agree to it before the CVA can be put in place, however, once it has been implemented all creditors are bound by its terms.


Unfortunately there comes a time where a company is beyond rescue, and there is little other choice than to close the business down for good. This is best handled by enlisting the help of a licensed insolvency practitioner who will be able to confirm whether this is the right course of action, or whether there is a possibility to save the business. If liquidation is the most appropriate process, the appointed insolvency practitioner will be able to ensure your business is closed down in the most efficient way, while ensuring your outstanding creditors get paid from the company’s assets in a fair and equal way. This prevents you from showing favouritism to certain creditors which would be seen a breach of your duties as company director.

Sole traders

As a sole trader there is no legal distinction between yourself and your business. Therefore should your business be struggling with unmanageable debt, you are responsible for paying this money back from your own personal funds should you be unable to do so through your business’s profits. At a time when your business is struggling to stay afloat, this pressure on your personal finances is often too much to deal with. There are debt remedy solutions available for sole traders in this position; however, they do differ from those options which are open to company directors.   

As there is no distinction between yourself and your self-employed business, any formal debt procedure you enter into will need to be a personal one. Depending on your level of debt, and the extent of your personal assets, this could take the form of a Debt Relief Order (DRO), Individual Voluntary Arrangement (IVA), or Bankruptcy.  

What if I need specialist business debt advice?

If your company is struggling, it is always advisable to seek expert help and guidance as soon as possible. At Real Business Rescue we can provide advice on a range of business debts from tax arrears, supplier debts, through to severe cash flow issues and what to do if you have suffered bad debt.

Our business rescue and recovery experts will take the time to understand your situation and show you the most appropriate way forward for you and your business. Remember, the sooner you seek help the more options can be considered and the better the chance of your business recovering. Call our experts today on 0800 644 6080 to arrange a completely free no-obligation consultation. With 78 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

Jonathan Munnery


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