In 2008, at the heart of the financial crisis, our advice helplines started getting a new thread of calls from people who were self employed or running their own business. A significant number were trades people, heavily reliant on the property building and development markets which had slipped into crisis point. Whereas before they had enjoyed a good relationship with lenders, suddenly very different behaviours were emerging. Foreclosures began, where before a couple of bad months and skipped payments due to poor trading would have been accepted.
Most of the calls to our advisors came in crisis, with a number even calling from outside the court building, very late in the day. Our analysis of some of the financial information our clients gave us showed that the average loan to value of their properties was only 25%. But the housing market was dead. As well as mortgage debt, the issues discussed on the calls were often only the ‘tip of the debt iceberg’ with a range of credit cards and other lending products. Levels of indebtedness and people’s preparedness to take on debt, as well as the propensity of the banks to lend, often make the headlines. However, underneath this we are not doing enough to support access to finance and understanding of debt for the group of people driving enterprise. The lack of access to bank finance for very small businesses or microfinance means that many people blend their personal and business debt. I was chatting to a young woman who had set up a franchise in hairdressing and her accountant had scared her to death. Looking at her numbers though, there was a mixture of personal and bank debt all muddled up with different terms and impact on her personally and the business. Of course, the worry hindered her ability to focus on the business. She worked through it over nine hard months.Due to the lack of access to a range of products that support self employment, and an underdeveloped UK microfinance offer, debt is a major problem for many people running or starting their own business. The capability and understanding of lenders varies considerably, as does the experience and understanding of people setting up. As the cost of living continues to rise, credit flows are easing a bit, but behaviours on missed payments/defaults continue to be hardline and there is a risk of further debt problems for many people in this space.The banks are seeking to increase credit flows and there are attempts to better support small business and new business by returning to a more ‘old fashioned’ model where bank managers had a greater understanding of, and better relationships with, the small businesses they banked. However, the level of ‘informal’ borrowing to support the self employed or small enterprises is still enormous. The use of personal credit to ‘tide over’ or ‘purchase essentials’ is significant. We have all done it and it is human nature. The debt support services on offer must provide a sharper focus on specific support for entrepreneurs and the self-employed. Knowledge of the range of support for the business aspect is as important as the debt advice per se. Simple techniques can also help people to help themselves. Get a separate credit card and only use it in emergency and only for business if you absolutely must. Pay it off as soon as you can so you don’t accrue interest. Be equally as disciplined on personal and business finance if you are mingling these together. Have that Dr Pepper moment – what’s the worst that could happen - and plan for it. The provision of finance for very small business is hard. As with personal finance, accessing £200 for four weeks is difficult because the products are not there. Some of the best international finance providers in microfinance still cannot differentiate between personal and business finance. However, we do need to do this, in order to look at the different issues of personal gearing and gearing a small business, prudently, to succeed. Debt impacts us all and better products coupled with better financial understanding are essential if we are to avoid further problems as the economy begins to pick up and interest rates on mortgages begin to rise.Manchester debt firm is liquidated owing creditors over £2.2m
Wednesday 11th August 2010
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