The Directors Helpline

2. Three early warning signs that your sole trader business could be in trouble

by Jonathan Cooper

Macclesfield-based The Directors Helpline has over 15 years’ experience supporting company directors on a wide range of issues – from general financial information, through to business recovery, restructuring and company closure. This is the second in a series of articles aimed at small business owners and company directors.

Being a sole trader has many merits. It offers flexibility, lower administrative burden, and – in the right circumstances – tax efficiency. But it also comes with significant exposure. Unlike limited companies, there’s no legal separation between the individual and the business, which means when things go wrong, personal finances can be on the line.

And in today’s economy, where costs are rising, cash flow is tightening, and the landscape is uncertain, sole traders can quickly find themselves in difficulty.

That’s why spotting the early warning signs of financial strain is vital. So, here are three red flags every sole trader should look out for before a manageable financial issue becomes a crisis.

Delays in paying HMRC or filing a tax return
If a business owner is struggling to pay HMRC on time or hasn’t filed its self-assessment return, it’s a sign the business may not be in control of its finances.

Often, sole traders delay submitting returns because records are incomplete, or they’ve sent information to their accountant too late. Unfortunately, the longer directors leave it, the more penalties and interest accrue, making it harder to resolve.

Falling behind on tax is one of the most common issues we hear about, but it’s rarely just a tax problem. It’s often a symptom of wider cash flow pressures or gaps in financial visibility. The earlier this is tackled, the better the outcome for the director and the company.

Taking out further credit for cash flow purposes
Credit can be a useful tool in business but not when it’s being used to plug gaps in everyday expenses or fund routine outgoings like rent, wages, or suppliers.

That’s a clear sign a business isn’t generating enough cash to sustain itself.

Some sole traders begin taking on more credit to solve short-term cash flow issues, only to find themselves stuck in a cycle of repayments and high interest. This kind of borrowing can quickly spiral and become unmanageable, especially without a clear plan o how to turn things around.

Ignoring bills or prioritising some creditors over others
If bills start to go unopened or certain creditors are being paid while others are left waiting, it’s a strong indicator that a business is under financial stress.

Unlike limited companies, sole traders are personally liable for business debts, which makes this particularly risky. Certain creditors, such as HMRC, may act more aggressively and be quicker to escalate unpaid debts, which can lead to enforcement action if left unaddressed.

In tough financial times, it’s understandable for directors to prioritise the people and suppliers who keep the business trading day to day, but ignoring other debts is a short-term fix that can lead to long-term problems.

A more effective approach to is to assess the situation early, communicate with creditors, and seek impartial support and guidance to understand all available options.

Don’t wait until it is too late
Many sole traders avoid seeking advice because they feel they should be able to manage things alone. But running a business and a company are two separate things entirely and being a business owner doesn’t mean having all the answers.

Just like having a good accountant or insurance broker, having someone to talk to when things feel ‘off’ can be one of the best decisions a business owner can make.

At The Director’s Helpline, we regularly hear from sole traders facing HMRC pressure, creditor action, Bounce Back Loan repayments, or uncertainty around their next move. Often, a short conversation helps them make sense of their position and take back control.

Ultimately, whatever financial position a sole trader is in, the earlier they act, the more options they’ll have.

So, whether it’s seeking guidance surrounding cash flow, dealing with HMRC debt, or understanding their obligations, it’s vital sole traders don’t struggle in silence. Recognising that support is available, and asking for help, is a sign of strength, not failure.

The Directors Helpline, Churchill Chambers, Churchill Way, Macclesfield SK11 6AS