​Tips on Finance for Sole Traders

​Tips on Finance for Sole Traders

Understand small business finance if you're starting up.

By Marcia Smith

Starting a small business at home is certainly a challenge. But if you love what you do and you have the determination and focus, there’s no reason why you can’t build your own, fantastic enterprise.

However, you need to do your research before you go ahead, including understanding small business finance. To help, here are a few questions to ask yourself before you order those new business cards!

What’s the best bank account for a sole trader?

In most cases it’s easy to open a bank account for a sole trader, with some people even using their personal account for their business. As long as you keep your business and personal finances separate so you can easily gather together the figures for your annual tax return, using one bank account can be convenient – at least until your business gets bigger.

Many of the high street banks offer startup sole trader accounts including Natwest, Barclays, Santander and Lloyds, with some even being free, or with extra support such as business advice. Shop around for the best deal.

You need to think about whether you need….

Debit card - A card could be handy if you’re out and about a lot or if you shop for items a lot online.

Cheque book - Obviously, most payments are electronic nowadays, but some businesses still accept cheques. The advantage of using them as a small business owner, is that you have a few days before money is taken from your account - helpful if your cash flow is a bit sluggish but you need to buy stock or office essentials.

Mobile banking - A must for the modern business is being able to monitor your business bank account on the go on multiple devices. Perfect for people who travel a lot or for home offices where you have minimal resources.

Overdraft facility - Watch out for expensive charges, but when you set up a bank account ask about adding an overdraft facility. Cash flow can sometimes be unpredictable, so an overdraft can be useful if you still need to pay expenses even if money is tight.

If you choose not to open a new sole trader account, and instead use your personal account, then it’s an idea to open a savings account where you can put aside your money for HMRC. This way, you'll already have the funds if you need to pay a tax bill on your annual accounts.

When should I start paying myself?

The simple answer is: when you can afford to do so and you need the money! Most small businesses will have cash flow issues in the early days, so you should live off your savings for as long as you can to give the business the best possible chance of success.

As a sole trader you can simply withdraw money from your account when you need it. But as a limited company director, salaries are made more formally and from a limited company bank account. In this case, you can pay yourself a minimum wage without paying any income tax. This is deductible from your corporation tax bill, so if you can afford to pay yourself you should do so, providing this leaves enough operating capital in the business. If you want to start a limited company, read up carefully on your legal requirements and talk to an experienced accountant.

How can I save money working from home?

With mobile technology now the norm, it’s becoming increasingly common for people to work from home. Plus it offers great flexibility if you need to juggle your family and professional life. From a financial perspective, a home office is also a great idea, for example…

Save on travel costs - Travelling to and from a place of work can be expensive. Not having to pay for fares or fuel, parking or car maintenance means that home workers save a considerable amount by not having a daily commute.

Childcare - Many women find that it’s uneconomical to return to work after having a family due to the high cost of childcare. Working from home means you can focus on your job during school hours, and down tools when it’s time for the school run. Of course, dad can do this too if he’s running his own business at home.

Food and drink - Buying lunch and a coffee every day while at work seriously adds up. Spending just £5 per day on food and drink is £100 each month, which is money that could be saved working from home.

But remember, when you start your own enterprise, any expenses you do incur in relation to your business can be filed in your annual accounts. So keep a note of things like energy bills, phone bills and car mileage and hang to all business-related receipts.