Back

How to manage money risks when you’re a sole trader

Written with our partners at:Boffix logo
5 min read

9th September 2020 update:

If your business is required to shut due to lockdown restrictions or other local interventions, then you may be able to claim a grant of up to £1,500 for every three weeks it remains closed.

Further details, including the amounts businesses could be entitled to are contained in the full announcement on .gov.uk

Update: 4th May 2020

The government have announced today that those people making a claim under the self-employed income support scheme must do so directly themselves. In other words, an accountant can not submit claims on behalf of their clients (although they may be able to help prep an application).

The claims service is due to open on 13th May, sooner than originally thought. When it does go live, those making a claim will need to do so via the government’s HMRC gateway, using their HMRC account details, also known as your Government Gateway ID.

In order to make your claim as quickly as possible, head to the government’s HMRC services site now and attempt to log in to make sure you have access. If not, setup is fairly straightforward, but may well delay your ability to make a prompt application once the scheme begins.

Covid-19 measures:

Q: I’m sick with Covid-19 and I can’t run my business, so there’s no money coming in. What should I do?

You need to manage your money fast. (See the next answers and guidance that follows in the rest of this Covid-19 section as well.)

Talk to your accountant and to your bank as soon as possible. They know of, and have early access to, the finance options that will be most suitable, and fastest, to help your particular business.

Sick pay equivalent

You can now claim the equivalent of ‘sick pay’ that an employee would be entitled to under the statutory sick pay regime. You’ll need to apply for Universal Credit, which will be available to you, in full, from day one of your sickness. You can apply for this online here.

Business interruption loan

You may well be eligible to apply for the new Covid-19 specific announced by the government, including the Coronavirus Business Interruption Loan scheme. This scheme is designed to keep businesses afloat. Under it, the government will provide banks and other approved lenders with a guarantee of 80% on each loan to a small business during this period. Loans of up to £5m can be applied for.

Talk to your accountant or your bank, who will be able to support you in evaluating your eligibility and applying for this interest-free (for 12 months) loan, or to consider your alternatives. You can find out more on this here too.

Self-Employment Income Support Scheme

The government has announced a Covid-19 emergency scheme under which self-employed businesses can claim financial relief due to their lost earnings. This separate scheme is called the Self-Employment Income Support Scheme.

The scheme guarantees 80% of a self-employed person’s monthly net earnings, up to a maximum cap of £2,500 per month, if you fit the following criteria:

  • you’ve lost trading profits due to Covid-19
  • you submitted a tax return in January 2020 (i.e. you were trading in the last tax year 2019-20)
  • you made a trading profit (not revenue) of £50,000 or less in 2018-19, or of £50,000 or less per year on average over the last 3 years
  • during those past 3 years, the majority of your taxable income (i.e. more than half), on average, has been from self-employed work
  • you are still trading (or would still be trading, but for Covid-19) and intend to continue to trade in the tax year 2020-21, when you apply for the relief

The relief will be backdated to 1 March 2020. And the government has said that if necessary, it will extend the support under this scheme to after that period also.

You can’t apply yet. The government currently expects that the scheme will be operational by the start of June, and that the entire sum will be directly paid to your bank account all in one go at that stage.

Take a look at our dedicated run-down of what this scheme does, who is eligible and how to apply for this relief in our Covid-19 blog section on Farillio.

There are still a number of questions around this scheme too. We will update this guide further once more clarity is available. It is again expected that HMRC will administer this scheme also.

Time to Pay – PAYE and NIC payments delay

HMRC also have special arrangements available for businesses in financial difficulties with outstanding tax liabilities. You may be able to agree deferred PAYE and NIC payments for any staff you might employ under HMRC’s emergency ‘time to pay’ regime.

This could have a huge positive impact on your cashflow, especially if combined with the government’s emergency ‘job retention scheme’ (see more on that below). These arrangements are agreed on a case-by-case basis and are tailored to the individual circumstances of each business. You’ll be eligible if your business pays tax to HMRC and is going to struggle to meet the next payments and keep going.

Call HMRC’s dedicated helpline to agree arrangements with HMRC: 0800 0159 559 or to find out more about the scheme, check here.

A quick word on insurance

Do you have keyperson insurance? If you do, it’s possible you may be able to claim on that insurance and pay for someone else to look after your workload for you, while you focus on getting better and getting back out there. Many policies won’t over infectious diseases though and those that do, will expressly list what they do cover, but it is worth asking.

Check the terms of your contracts too, just to ensure there’s nothing preventing you from bringing in someone else to ‘babysit’ the business for you while you’re recuperating.

Business interruption insurance would be the other insurance safety net to consider. But again, while some insurers may cover the closure of a business due to known infectious disease (which are often listed), Covid-19 is probably too new to be covered by most standard business policies. And business interruption policies probably won’t cover the need to close a business because you need to self-isolate. These are unprecedented times.

You might have an income protection insurance policy. Many sole traders take these out. These policies typically cover absence from work because you fall ill or you get injured. They normally have a waiting period before money gets paid out though and, again, most of them are unlikely to cover the need to self-isolate/recover from the virus, since you’re probably going to be recovered and able to work again before the waiting period ends.

But some of these policies with a short payment term will kick in with a very limited (e.g. 1 week) or no waiting time, and these could well cover people who are ill or self-isolating on medical advice and who are unable to work.

Check your cover with your insurance broker, or the insurer directly if you bought your policies directly.

Q: How should I manage money risks when my business is struggling with cashflow?

Even more carefully than usual. The money risks involved in operating as a sole trader are covered in this guide. The biggest risk being that your personal income and assets (e.g. flat/house, car, savings) are at risk if you cannot pay your business debts.

The good news is that the government has announced emergency measures to help, and you should be able to benefit from some of them, for example:

deferment of the next VAT quarterly payment:

This means your businesses won't need to make pay the VAT due for the coming quarter (April–June 2020) until the end of the 2020-21 tax year (i.e. next April). This is essentially a cash loan for your business from HMRC. VAT for the 3rd quarter of 2020 (July–September 2020) is currently still payable at the end of September 2020.

Income Tax:

Delay of your next income tax return, so that this year’s tax won’t need to be paid until end of January 2022 – though you should still budget to pay your tax so that it doesn’t become a nasty crunch point when it falls due.

Rent-payment breaks for residential tenants:

Residential tenants can apply for a three-month payment holiday from their landlord.

No one can be evicted from their home or have their home repossessed over the next three months.

At the end of this period, landlords and tenants will be expected to work together to agree sensible repayment plans.

Rent-payment breaks for business tenants:

If you rent a property for commercial reasons, e.g. a workshop, storage facility, factory, etc., there is currently no specific relief outside of the loans, grants, etc. that the government is making available to help businesses manage the costs of their overheads.

Tenants who are unable to use their premises because of government-ordered shutdowns may try to seek a rent suspension arrangement or to withhold rent, but this is likely to be a breach of their lease obligations unless they can argue that the terms of their lease specifically permit them to take this action in these circumstances or, if the lease includes it, the ‘force majeure’ clause within their lease covers these exceptional circumstances – often it won’t have specified this kind of event, meaning that the tenant isn't permitted to do this.

Business rates relief:

There are a number of business rate reliefs available too – if you pay these for your business.

The government has introduced a payment holiday, meaning you won't have to pay these rates for the year 2020/21.

You can find out more here. Particularly weighty measures are available to those in retail, hospitality and leisure, but even if you’re not, you should check out the other rate reliefs – most small businesses to whom rate payments apply will benefit from this holiday.

Universal Credit:

Self-employed people can now access full universal credit at a rate equivalent to statutory sick pay. You can apply for this online here.

Other possible cash grants that may apply to your business:

Your accountant will be able to advise you on these.

Job retention scheme:

If you employ staff, look up the Covid-19 Job Retention Scheme, which if you’re eligible, means that the government will cover 80% of the salary of an ‘at risk’ employee, up to a cap of £2,500 per month, per employee. The government is calling these affected employees ‘furloughed employees’, meaning staff that you’d otherwise have to lay off or make redundant if you didn't have this emergency 80% salary cover.

You can use our template letter changing employment contract for furlough arrangements to do this quickly and simply.

This arrangement is backdated to 1 March 2020 and will apply to the wages of affected staff for a period of 3 months (or possibly more if needed).

For more details on the Job Retention Scheme and to determine whether you’re eligible, click here. HMRC is developing a dedicated online portal to process applications and portals.

Don’t forget the Business Interruption Loan Scheme and time to pay arrangements agreed with HMRC – covered in the first answer to these questions.

Check your insurance position too. We’ve covered some of the possible protections above.

In addition to those insurance policies already mentioned, if you have trade credit insurance, now may be the time to make a claim on that policy.

This type of insurance protects you when customers don’t pay or delay paying you for goods that they’ve ordered from you. It primarily covers the position where a customer goes insolvent or delays paying you. It doesn’t usually cover suppliers going insolvent or reducing their supply volumes.

If you’re having difficulties paying back credit cards or loans (that are not mortgages), you should talk to your bank as soon as possible. They may be able to put in place a special payment plan for you.

Bounce Back Loans

From Monday 4th May, there will be a new fast-tracked loan scheme for small businesses. The scheme aims to provide businesses with much-needed finance within days, with loans backed by a 100% guarantee from the government for sums between £2k–50k.

Visit the government's website here for more information.

Q: What can I do to make my money last and protect my business and personal finance position?

  • Act now and act fast
  • Make sure, to the best of your ability, that you’ve minimised spend
  • Cut out everything you don't need to pay for (or can live without right now) and that, legally, you can immediately stop incurring fees/charges for without ending up in breach of a contractual commitment to pay (do check any contracts you have in place for this spend – you may not be able to terminate payment arrangements immediately in some cases)
  • Just for now, pay at the end of invoice payment periods rather than earlier
  • Review any unavoidable spend, e.g. rent on a workshop or vehicle, and immediately contact the landlord/hiring co to see if you can agree to alternative, emergency payment terms that will enable you to pay by instalments/delay payment just for this period. Farillio’s template will support you in doing this

These are extraordinary times, most businesses, if they can afford to do so, would prefer to keep your custom and know that they have normally reliable and considerate tenants/customers once this Covid-19 period is over.

  • Review all our direct debits and consider whether there's anything not essential to your business. Consider getting rid of them if they’re not critical and you won’t be breaching a contract by cancelling them

  • Take advantage of the Covid-19 ‘buffers’ that the government are offering, as listed in the answers to the first and second questions

  • If you’re running a restaurant or a pub serving food, and you don’t already have local authority permission to do so, you’ll be able to offer a takeaway service without having to undergo the usual permission process, due to emergency temporary laws facilitating this. You’ll just need to notify your local authority that this is how you're now trading.

Q: I’ve run out of money for the business, I’m in debt already and none of the above measures can help me…

The reliefs available are unprecedented and as generous as we are likely to see from the government during this exceptional emergency period. If none of them are available or enough, talk to your bank as soon as possible.

If you have insurance, it’s likely that you may also have access to a free legal and tax advice helpline, where qualified experts may also be able to make suggestions and guide you through your options.

Choosing to run your business as a sole trader has a number of advantages: less administration than running a limited company, simple to set up, sometimes it can even reduce your costs.

However, the disadvantages to choosing a sole trader model rather than a limited company can be quite significant, especially if your business starts to struggle with cashflow.

We asked Farillio’s long-standing expert on business and accounting matters, Aaron Patrick, the head of accounting at Boffix, to explain where the money risks lie for sole traders.

Personal liability

As a sole trader, YOU are the business. Personally, as well as commercially.

This means that any debts from the business are potentially a personal liability that you'll have to find a means to pay because the law (and HMRC) makes no distinction between you and your business. And this personal liability is unlimited.

This is by far the most significant risk for anyone trading as a sole trader. The limited company business model shields your personal assets (e.g. flat/house, car, other valuable belongings, savings) from any debts incurred by your business, as long as you run the company responsibly and lawfully.

Sole traders don't have that firebreak. In a worst-case scenario, you could be forced to sell personal assets to repay outstanding business creditors.

The debts in a typical business can be from your suppliers, defaulted borrowings, utility bills, rent on a workshop or a desk space (for example), and don't forget HMRC and tax that’s due, which might be VAT and/or income tax.

Any of these creditors can get a court order, if necessary, to force you to sell your possessions to satisfy what you owe them.


Finance options are more limited

Overdrafts and loans

Banks can be more cautious of lending money to a sole trader, compared with loans to directors of a limited company. They’re likely to agree to only limited overdraft and/or loan facilities, especially if you’re not able/prepared to agree to personally guarantee the agreement – something that carries a very high degree of risk.

Please take advice from an accountant before you agree to give any personal guarantees.

If you feel you have no option but to do this, and you've taken advice, you may want to consider insuring the risk. For example, the risk of securing a loan against your property could potentially be mitigated by taking out mortgage protection insurance.

In Aaron’s experience, banks and traditional lenders tend to have more confidence in limited companies, which he attributes in part to the more detailed and stricter filing, management and financial requirements, including accounts that must be produced and filed with the UK’s official registrar for companies, Companies House.

Getting investors

Unlike limited companies, sole traders can't raise funds by issuing shares to investors. Limited companies can give a share of ownership to friends, family and others to help them manage cash burn.

They can also apply to HMRC for the ability to offer powerful tax incentives to these investors, enabling those investors to claim back up 30% to (in limited cases) 50% of their invested money from HMRC. Go to the gov.uk site to view the figures.

Crowdfund-style Kickstarter or Indiegogo fundraises may still be possible for sole traders, however, since these fundraise campaigns are backed by customers wanting the product you’re making (it’s rare that services work in this environment). They’re not looking to buy a share in your business. They’re essentially pre-ordering and paying money upfront for a product that they hope to receive in the near future.

Invoice trading and invoice factoring

Invoice trading is a popular route for more established business owners keen to get some cash quickly, unlocking funds tied up in outstanding invoices and improving cashflow.

For a fee, online platforms such as Sancus Finance enable businesses to auction their invoices online – either individually or in bundles. Buyers on the platform compete to offer the most competitive price for the invoice(s) selected and, if accepted, they advance the invoice owner the money.

The invoice-owning business then agrees to buy back the invoice after a period of time – typically 30, 60 or 90 days.

Amounts involved vary substantially, from £25,000 (or less in some cases) to £1m+. Fees are usually calculated as a percentage of the invoice amount due and the bank will want assurance that your customers are good for the money.

Invoice factoring can be a very neat way of managing money risks and knocking out some invoicing uncertainty and admin too.

Invoice factoring is similar to invoice trading in the way that you can unlock funds tied up in your invoices; but, instead of them being bought by online buyers, they are mainly managed by banks. The bank gives you an advance of up to 90% of the invoice’s value, and they then get the invoice paid on your behalf, retaining the 10%, as the fee for their efforts.

In the case of both of the above, sole traders will need to demonstrate a stable customer base and income to have a good prospect of getting the bank to agree to these arrangements.

New ways of managing invoice factoring are starting to emerge via the accountancy software providers too. This is a space to keep an eye on, as these new solutions are designed to be faster and more small-business friendly than is currently the case.


Want to access this guide?

Already have a Farillio account?Sign In

Get unlimited access to 100s of legal resources by signing up to Farillio today.

  • Manage your legal documents online
  • Well written legal templates by our partners
  • Guides to help you understand law
  • Legal help available every step of the way
Sign up

Read the full guide

Farillio members have access to all our online content

Farillio is THE trusted resource for businesses and households with:

  • Self-serve guides
  • How-to-do-it videos
  • Interactive documents and checklists
  • On-demand advice without hefty fees

If you need to do something complicated fast, we can take you through it, in plain English.

Many household names have chosen Farillio for their customers or members so we may be included in a service or product you've already purchased.

Already have a Farillio account?

Sign in

While we can connect you with some very fine advisers in the UK, and we collaborate with them to provide you with great materials, Farillio itself is not a law firm. We do not directly provide legal advice ourselves. All resources are available for you to use (according to our terms and conditions), but those resources are not legal advice to you and neither are they a substitute for you taking legal advice from a lawyer.