Advice for sole traders and directors in Northern Ireland struggling with business cash flow problems

Whether you’ve set up in business as a sole trader or a company director, retaining control of your cash flow is crucial to success. Lack of cash is one of the main causes of business failure, even for those profitable in the past.

When insolvency threatens it is vital you know your options to ensure you make the best choice for both yourself and your company.

Sole traders and formal insolvency

When you can’t pay your bills as they fall due, your business may be insolvent. This doesn’t mean that it has to close, however. With so many effective insolvency procedures available to Northern Ireland businesses, you may be able to get back on track with the guidance of a licensed insolvency practitioner.

As a sole trader your personal finances and business finances are interlinked. Therefore any debts that build up through running your business are your personal responsibility. This means that the failure of your company could have severe repercussions on you personally. Any formal insolvency procedure you may need to enter into will be one aimed at individuals rather than companies.

This could include an Individual Voluntary Arrangement (IVA) where you agree to repay your creditors through a series of affordable monthly instalments. Some of the debt you owe is likely to be written off at the end of the IVA, although you will be contracted to make repayments for a period of typically five years.

Depending on your amount of debt and level of income, you may qualify for a Debt Management Plan (DMP). You will only be able to enter into a DMP if you have some money left over each month after paying essential bills and living costs. If you are struggling to meet even day-to-day costs, you may have to consider bankruptcy. Although bankruptcy will give you a clean slate financially, it is an extremely serious step to take and will impact upon your credit history for six years, affecting your ability to obtain any form of credit from a mortgage down to a mobile phone contract. Always seek the guidance of a professional debt adviser before committing to any insolvency procedure.

Limited company directors and insolvency options

In the majority of cases, company directors will benefit from limited liability in the event of the company’s insolvency, meaning they will not be held responsible for paying the debts of the business. This is because, legally, a company is seen as a separate entity from its director(s).

However, this does not mean that you do not need to address your business’s financial concerns.  No matter how bad you feel the situation is, there is a solution out there to help solve the issues you are currently facing. It is vital that you speak to a licensed insolvency practitioner as soon as your company begins to experience financial difficulties.

An insolvency practitioner will be able to talk you through the different options which may be open to you and recommend the most appropriate course of action. Insolvency procedures come in various forms; some aiming to rescue the business, while others help you bring your company to a formal end.

If you believe your business would be able to turn a good profit if only it wasn’t battling against its current debt problems, you may be able to consider a formal insolvency procedure called a Company Voluntary Arrangement (CVA). In its simplest terms, a CVA is a legally-binding formal repayment plan a company enters into with its creditors. This allows for the outstanding debt to be cleared through a series of affordable monthly instalments, instantly easing cash flow pressure and allowing trade to continue. The idea is that current debts are paid using future profits; this means that only those businesses which have a realistic prospect of achieving future profitability will be able to consider this type of procedure.

Unfortunately, sometimes a company’s financial problems are at such a level where there is no option but to cease trading and wind up the company’s affairs in an orderly manner. An insolvency practitioner will be able to place your company into liquidation through a process known as a Creditors’ Voluntary Liquidation (CVL). The appointed insolvency practitioner will gather all the company’s assets including cash at bank, sell any physical property, and distribute the proceeds to outstanding creditors. Any debts remaining after this will be written off and the company will be struck off the register held at Companies House.

A warning to company directors about limited liability

Despite limited liability, there are some instances when you do become liable for company debts, however – in the face of misconduct, for example, or wrongful trading.

Another common example is if you borrow money from your own company. When the business enters insolvency you’ll become liable to repay this amount from your personal funds, regardless of whether you can afford to. In some cases, this can result in personal bankruptcy alongside a company’s insolvency.

Advice for sole traders and company directors

If you are alerted to potential problems early enough, there are a number of ways to protect yourself and your business from formal insolvency. Here are a few tips to help:

Understand the mechanics of your business

It’s the underlying systems and procedures used every day that will help you stay in control. Regular invoicing and payment collection are just two areas that require efficient processes to be in place if you’re to maximise cash availability. If you understand why poor credit control exposes your business to the risk of bad debt, for example, it’s less likely to affect your business to the point of serious financial decline.

Seek professional insolvency advice

Licensed insolvency practitioners (IPs) offer in-depth business knowledge and industry experience, and often have contacts with alternative lenders offering flexible finance deals. It’s possible to seek professional insolvency advice at any stage of business development, not only in cases of dire need.

Start-up businesses and established organisations alike can benefit greatly from the commercial acumen and industry experience offered by a licensed IP, and ensure the decisions made are based on professional guidance.

Forecast your cash flow regularly

Cash flow forecasts offer valuable insight into your cash needs over the coming months. They can be used to avoid shortfalls and identify cash surpluses, allowing you to plan a growth strategy or simply remain confident that you can pay the bills.

How we can help

Northern Ireland Debt Solutions can arrange a free same-day meeting to discuss your situation. Our licensed insolvency practitioners will ensure you understand all the options available, and guide you towards the best solution.