Jane Tully, director of external affairs at Money Advice Trust, the charity that runs Business Debtline, discusses the challenges surrounding debt that small businesses face.
At Business Debtline, we hear from small business owners and self-employed people who are trying to cope with often challenging financial circumstances. Last year, our free debt advice service helped over 50,000 people over the phone and via webchat to take the steps they needed to deal with their financial situation.
Through this engagement, we gain an insight into the stories of the people we help and the factors that contribute to their difficulty. Our Taking Care of Business report, published in November last year, shines a spotlight on the key challenges faced by people contacting Business Debtline.
Here are some of our findings , which highlight areas we tuink need improvement:
A complicated debt picture
When we talk about the people we help at Business Debtline, the majority are sole traders (65%). The small business owners we help tend to run ‘micro-businesses’, often with no employees.
A range of different debts are normally involved. Most callers have up to five different types (68%), although a significant minority have 11 or more (9%). As you may expect, Income Tax and VAT arrears are among the most common business debts our advisers deal with. However, rent arrears and energy debt are also regular challenges our advisers hear about, with 15 per cent of all callers in energy arrears.
This mixing of business and personal debts often complicates an already complex situation further as it becomes harder to distinguish between essential household bills and business-related costs.
Similarly to an unpaid tax bill, the impact of an unpaid household bill, for energy for example, can also be significant. Both are classified as ‘priority debts’ due to the possible action that creditors can take. In both cases, urgent action is needed. In the worst case, your gas and electricity supplier has the power to cut off your supply and in the example of unpaid Income Tax, HMRC has the power to use bailiffs and to pursue you through bankruptcy proceedings.
One of the root causes we found for energy debt concerned metering and billing. More often than not, suppliers used estimated bills, with clients’ direct debits set at a lower amount than what was actually used.
After a supplier read the meter and calculated the difference in what was owed and already paid, our clients were then hit with a ‘catch-up bill’. In many cases, such bills required payment in one go, with the individual not in a position to pay the full amount. In such cases, engagement with the supplier at an earlier stage can make a huge difference.
Delays in seeking advice
Delaying contacting creditors or seeking advice was commonplace. In the majority of cases, people delayed contacting us until they were already behind with payments. More than four in ten people waited a year or longer before seeking advice, during which time debts worsened, taking a toll on their business and personal finances.
Nearly half (47%) of our callers surveyed said that stress about debts was the main reason for not seeking advice earlier. Worries about being judged or criticised were also a major factor. Only 18 per cent of people contacted Business Debtline as soon as they started struggling.
We found that the stress and worry many people experience before seeking advice are for debt problems that are resolvable. What is consistent across our clients is that the longer people waited, the more difficult and complicated it became to resolve their situation.
If faced with bills you are struggling to pay, engage with your creditors, be they energy suppliers, the bank or HMRC as early as possible. And if you are not sure of what to do, seek free advice.
While I have focused on the challenges the self-employed people we help face, there is a crucial role for creditors to play in the way they communicate with customers and how they signpost people to specialist support.
How the government can help
On broader issues, such as late payments, we think more needs to be done to support people to get money earned on time. Our advisers hear on a daily basis the impact of late payments on things such as cash flow. One area that could make a difference is greater powers for the small business commissioner to fine persistent late payers, a step we call for in our report.
And for self-employed people in financial difficulty, there is a small piece of good news on the horizon in the form of the government’s Breathing Space Scheme. When introduced, the scheme will freeze interest on outstanding debts for people seeking debt advice as they work through their situation with professional help. Crucially, the government has agreed to include the business debts of sole traders as part of the scheme.
There is still much work to do to address ongoing challenges such as late payments and the impact of variable incomes. But remember, there is specialist support available and if you find yourself in financial difficulty, get in contact as soon possible and before issues escalate.
Further information about Business Debtline is available at businessdebtline.org.