Business Owners Use Personal Finances to Keep Afloat

Credit CardsThe average small-business owner has borrowed more than £20,000 from friends or credit cards in order to keep their business going, new research has highlighted.

A study of 750 small firms by the Centre for Economic and Business Research and Make It Cheaper found that 47% had to inject cash from personal sources — with businesses typically borrowing £20,400 over a three-year period.

More than a quarter (27%) had turned to friends and family, while 25% had borrowed on credit cards, according to the poll. More than one in ten (13%) had remortgaged their home to raise cash.

Jonathan Elliott, managing director of Make It Cheaper, said it was “no surprise” that firms were turning to personal loans and credit cards to survive in the current climate. “Many small businesses feel they have no alternative,” he said.

The Federation of Small Businesses (FSB) said restricted access to loans and high lending rates were still making it difficult for small firms to borrow from banks, meaning more firms were seeking finance elsewhere.

“We know many of our members are turning to credit cards, which are seen as an expensive but accessible option.”

said an FSB spokeswoman.

“Borrowing on a card is, for many, preferable to putting up their house as security in return for a bank loan.”

But independent financial adviser Alan Smith, chief executive of Capital Asset Management, said that costly borrowing on credit cards or asking for favours from friends should be avoided where possible.

“If you’ve got no choice but to borrow from friends or relatives, at least set things out clearly — agree how much you’ll repay by when, if you’ll pay interest and so on. Otherwise things can become acrimonious.”

Alternatively, releasing funds from a pension fund was an option that was “typically unexplored” by businesses, Smith added.

“A lot of small-business owners will have set up pension schemes over the years, so it’s worth checking old policies and plans. It’s usually possible to borrow up to 50% of the value of the fund, and rates for borrowing can be very competitive — around 3% over base. You should always take professional advice, but it can be straightforward to release funds tied up in pensions.”

However, business owners needed to make sure they were able to pay back into their fund when cash levels picked up, otherwise they risked their long-term financial security, Smith warned.

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