Are UK small businesses building their futures on a financial house of cards?

AXA Business Insurance asks if unsound financial culture is the biggest threat to the millions of small businesses that are driving the economic recovery.

While these businesses are leading the world with 21st century innovation, their finances are too often based on credit cards and overdrafts, reveals the insurer.

Income margins remain tight with a third of small business owners taking home less than £10,000 a year

45 per cent of businesses paper over shortfalls in income by taking debt on their credit cards and bank overdrafts

Similarly, credit cards and overdrafts are largely propping up business funding in the UK, despite the raft of new government schemes introduced in recent years

Slim savings cushions and poor income protection leave AXA questioning if many businesses could survive a setback

AXA highlights little things businesses can do to help their finances

The study by AXA Business Insurance, UK business insurer, found that around a third of small business owners take home less than £10,000 a year from their businesses. Similarly, 28 per cent do not pay themselves a regular salary but take lump sums as and when cash flow allows. After that, incomes average out as follows:

38 per cent estimated that they fell into the £10,000 to £32,000 category for the tax year April 2013/April 2014. After income tax, that means take-home pay is, at best, £24,578;

20 per cent are pushing above the UK average wage, earning £32,000 or more, while the big bucks are being earned by 2 per cent of small businesses, taking home £150,000 or more.

For the current tax year, most business owners told AXA that they do not see this situation changing – 59 per cent said they expect income levels to remain the same. That is mitigated by the sizeable number – 27 per cent – that expects better take-home pay by April of next year.

Credit cards and overdrafts paper over funding cracks

Credit cards and overdrafts are a prime survival mechanism for small businesses: 45 per cent of businesses use them to cover fluctuations in cash flow. The same pattern is seen when they seek funding for growth – a small business is still more likely to access it from an overdraft facility than from one of the flagship government schemes.

AXA’s research found that only 12 per cent of small businesses had accessed funding in the first two quarters of this year: of these, eight per cent received it through Funding for Lending and a further 11 per cent from a government grant or loan. By comparison, 24 per cent turned to their credit card, 27 per cent – an overdraft, and 18 per cent received the money they needed from family and friends.

Small businesses at risk without adequate savings and protection

AXA has also found that many small businesses are also poorly insulated with savings that could tide them over an unexpected setback: 26 per cent have less than £1,000 in savings, and a further 24 per cent – less than £5,000.

This is more worrying given that the majority of the UK’s small businesses are, probably unknowingly, operating without basic insurance like employers’ and public liability cover when they need it.

Over half (53 per cent) of small businesses requiring employers’ liability insurance by law have failed to buy it. Forty-three per cent of those who have the public on their premises or carry out work on others’ property do not protect themselves from compensation claims with public liability insurance. Finally, more than half of those who provide advice cover themselves for negligence claims with professional indemnity cover.

AXA also found that only a quarter of small businesses have Personal Accident Cover or Business Interruption Cover as part of their insurance. With a thin savings cushion, this would leave many businesses relying on debt to pay their bills and salaries if they faced a drop in income in the weeks after an accident, flood, fire or theft.

Darrell Sansom, Managing Director at AXA Business Insurance, comments: “Small businesses are the future: sole traders and entrepreneurs with just a handful of staff now make up 95 per cent of the private business sector. And let’s make no mistake; these businesses are energetic, robustly optimistic and are breathing new life into our economy.

Our findings do suggest, however, that many face a daily struggle with uncertain cash flow and lack of funding availability. They’re also lacking the vital safety nets that will see them through setbacks, shortfalls and the hard times. Quite simply, overdrafts and credit cards should not be the only fall-back they have.

Businesses need to know that there are government funding schemes they can benefit from, what kind of insurance they need and why it’s needed, as well as getting information on the financial practices and tools available to tackle common risks.”

Little things that can help business finances

Check if you qualify for funding under the Funding for Lending scheme, Government Start Up Loans, Enterprise Finance Guarantee, Seed Enterprise Investment Scheme (SEIS), or free advice under Passport to Export or GrowthAccelerator.

Make sure any spare cash is kept in an interest-paying account and ensure you claim all the business expenses allowable against your tax.

Get renewal dates for key supplier contracts in your diary: many businesses will save themselves money on energy, Internet/mobile phones and insurance simply by shopping around once a year. 

Check your business insurance policy and sums insured are up-to-date: talk to your insurer if you have any doubts about the cover you need.