Advice for sole traders and directors in Scotland struggling with business cash flow problems
Running a business can feel like a lonely existence, even when trade is good. You make all the decisions yourself, and have to rely on your own judgement to make the business a success. When cash flow becomes an issue and you are struggling to regain control, it can turn into a serious situation surprisingly quickly. Even if you’re making a profit, unreliable cash flow can have devastating effects, even having the potential to put you out of business entirely. During these times it is important to understand your options should your business continue to decline.
Formal insolvency procedures for sole traders
Insolvency procedures are sometimes the only option, and although it may seem as though turning to one signals the end of your business, they can in fact turn a business around by offering the extra time needed to trade out of difficulty. As an example, the Debt Arrangement Scheme (DAS) involves paying your debts in full, but at an affordable rate across a set period of time. It freezes any interest and charges on the debt, and crucially, stops legal action by creditors.
As a sole trader you are personally liable for all the debts of your business, so a failure to keep on top of them could be disastrous for your own financial position. In some cases you may have to consider sequestration – the Scottish equivalent of bankruptcy – if your debt problems become simply unmanageable. A licensed insolvency practitioner will be able to examine your sole trader business and its associated debts and advise on the most suitable option based on your individual circumstances.
Advice for company directors
Limited companies are, by their very nature, afforded limited liability status which in many cases is part of the attraction of setting up as a corporate entity as opposed to operating as a sole trader. This means you will not be held personally responsible for the debt of your company.
However, if your company is experiencing financial distress, it is still vital that you seek the help of a licensed insolvency practitioner in order to achieve the most favourable outcome for you, your company, and its creditors.
If your limited company has the potential for future success, a formal restructuring procedure known as a Company Voluntary Arrangement (CVA) may be possible. A CVA allows you to enter into negotiations with your outstanding creditors to devise an affordable plan for paying off the money you owe. Often a portion of the debt will be written off, with the remaining being paid through monthly instalments over a number of years.
Alternatively, it may be the case that your company’s problems are more serious; you have no desire to continue trading; or there is simply not a large enough market for your product anymore. In these instances you may want to consider bringing your business to a formal close. This is most commonly done through a process known as a Creditors’ Voluntary Liquidation (CVL). In a CVL, all company assets will be sold and the funds distributed to outstanding creditors. The company will then be officially shut down and removed from the Companies House register; any remaining debts will be written off unless the director has personally guaranteed them.
The closure of your business may also be achieved using an Administration procedure if it is believed that this will generate a better level of returns for creditors rather than opting for liquidation.
Company directors and limited liability
While limited liability does protect a directors personal financial position, there are times when a director can be held liable for company debts, not least when there are signs of director misconduct (whether intentional or unintentional), when a personal guarantee has been given, or when a director has built up a large directors’ loan account to the point where it is overdrawn. In an insolvency situation, this overdrawn loan account would be an asset of the company and would need to be repaid to realise funds for creditors. In other words, you as a director are in debt to your own company.
In this situation, your company could find itself in a corporate insolvency procedure whilst you could be in a separate personal insolvency procedure such as sequestration. It is important you seek professional advice to understand the potential effects closing down your company may have on your personal situation. Enlisting the help of a licensed insolvency practitioner at an early stage can help reduce the chance of being held personally liable for company debts should the business be beyond rescue.
Potential redundancy pay for company directors
In a liquidation or administration process, a company director might also have a legitimate claim to director redundancy which – according to RedundancyClaim.co.uk – is worth on average £9,000. This claim is criteria-dependent but it’s worth enquiring about your eligibility; in many cases, a redundancy pay-out can help a director with their liquidation fees, overdrawn directors’ loan account, and/or any personally guaranteed loan agreements.
Options to consider before insolvency
Before going ahead with an insolvency procedure, there are several things you can try to help rejuvenate your business. Here are a few tips to help you get back on a solid financial footing.
Know and understand your numbers
It’s crucial to recognise and understand the figures that make up your profit and loss account, and balance sheet. When you’re aware of what they mean in terms of everyday business, and how they interact with each other, you’ll be able to spot potential issues in advance.
How much does it really cost to sell your products or services, for example? Have you included all the specific costs of producing, as well as delivering, that item to the end user? If you’ve been underestimating the cost-of-sales figure for a while, it could be the reason why cash flow has been an issue.
Additionally, it’s often the length of time taken to collect money in that causes a lack of available working capital. Your cash flow is compromised by regular late payers, even though you’ve delivered your obligations in the contract or arrangement.
Seek professional advice
Although an accountant might be the natural choice of adviser in the first instance, a licensed insolvency practitioner (IP) can offer a fresh perspective using their extensive knowledge and practical experience.
Insolvency practitioners offer valuable guidance at any stage of financial distress, and can help before your financial difficulties become serious. They’ll make sure you understand all the available options, which might include sourcing additional finance during a market downturn for example, or selling one or two assets to boost your working capital.
Cash flow forecasts
Being able to anticipate the cash needs of your business over a period of months is not only very comforting, it’s crucial to staying afloat. It lets you get ahead of problems, highlighting the times when you might need to borrow money.
A cash flow forecast gives you greater control generally – you can arrange extra funding with your bank or other lenders in advance, feel confident that not only will regular liabilities be met, but that growth is also achievable.
Dealing with long-term cash flow problems is demotivating, and it can be easy to assume that the business will not recover. Rather than viewing potential insolvency as the end for your business, however, it could mark the beginning of a new stage if you establish effective systems and become more aware of why cash flow is a problem.
Scotland Debt Solutions can help you avoid insolvency. We will identify all the options, and offer guidance on the best way forward. Call one of the team for a same-day consultation free-of-charge.