Updated: 4th March 2021
Whether you run a sole trader business or are director of a limited company, when business declines it can be difficult to know whether to carry on trading, especially when it comes to Christmastime.
On the one hand you may feel there’s a good chance of trading your way out of difficulty through the Christmas period due to the general upsurge in consumer activity, but you face serious repercussions if you worsen the position of creditors by doing so, and have no specific plan to deal with the necessary repayments.
So here are a few considerations which, when taken as a whole, could help you decide whether to trade through Christmas.
If you can identify a specific and short-term cash flow problem using reliable figures and projections, you may be able to ease the situation using additional funding. Various forms of alternative finance now exist that are quick to secure and offer valuable flexibility.
Are any of your creditors threatening legal action against the business? If so, and depending on the amount you owe, they may be able to obtain a winding up petition. Even if you’re unaware of any such threats it’s important to know exactly how much you owe to each creditor, and the potential legal action they could take.
Are you able to save money by cutting costs? Selling non-essential assets, moving to smaller premises, or managing your inventory more efficiently, can all offer the extra working capital needed to keep the business afloat.
You’re expected to be fully aware of the financial position of your business at all times, and to understand the implications presented to you in your financial statements. The business may be insolvent if you cannot pay the bills as they fall due, and/or your liabilities exceed the value of total assets.
Trading whilst insolvent carries serious risks in terms of your own financial situation, and it’s crucial to obtain clear insolvency guidance in this respect. So what are the risks of trading if your business is insolvent?
Personal liability for some or all business debts, even if you’re a company director
As a sole trader you’re personally liable for the debts of your business, but this is also the case as a limited company director if you take on more debt or carry on in business when you know, or could reasonably be expected to know, that your business was unable to meet its liabilities.
Disqualification from office for up to 15 years
Company directors can be disqualified from office for 2-15 years if an investigation reveals misconduct or wrongful trading.
Prosecution if fraudulent activity is uncovered
You may even face prosecution if serious fraudulent activity is found.
Your business may benefit from the flexibility and ease of access to funding such as invoice finance or merchant cash advances. With less reliance on a good credit score to secure these types of finance, they can bring in the working capital you need to survive.
Informal negotiations with creditors
You should contact each creditor individually and attempt to negotiate a repayment plan. Being open about your financial situation, and proactive in dealing with it, can help you to reach agreement.
Taking a reduction in salary shows you’re putting the interests of creditors first, and are taking positive steps to repay your debts. This is a crucial factor if the business has to be liquidated at a later date.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement is a formal insolvency procedure for limited companies. It’s a legally binding agreement between the business and its creditors to make affordable repayments over a longer period of time, and can provide the breathing space you need to trade your way out of financial difficulty.
Time to Pay arrangement (TTP)
HMRC sometimes offer extra payment time to businesses struggling with short-term cash flow problems. Again, you need to be proactive in contacting them, and honest in explaining the issues you face.
Regular board meetings
Holding regular minuted board meetings demonstrates you’ve formally assessed the financial situation of your business, and discussed the best methods of dealing with it. This can prove invaluable if you’re accused of wrongful trading in the future.
Professional insolvency advice
By seeking the opinion of insolvency professionals you gain a clearer picture of the potential risks, and can make an informed decision as to whether you should trade through Christmas.
Real Business Rescue are insolvency specialists with extensive experience in all industries, and can quickly assess your situation. We offer free same-day consultations, and operate a network of 100 UK offices.
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