Can special loans for the self-employed help to tackle income insecurity and debt?
Last week the Newcastle Building Society launched two new mortgage products aimed specifically at meeting the needs of the growing ranks of self-employed people. The launch didn’t make a big splash, but the steady growth of a market in specialised credit products for freelancers is a crucial and much-needed shift, as our new research shows.
As part of our research programme with the New Policy Institute on the changing face of self-employment, Citizens Advice has explored how self-employed people manage their finances and move in and out of debt. We found that self-employed people experience debt differently to the general population, and need different forms of support. Interestingly, we found that self-employed families are now nearly twice as likely to fall behind on household bills than families where all adults are employed. They also have slightly more mortgage debt, and one in seven self-employed households find their mortgage payments a heavy burden. Why is this, and could new credit products help?
Lack of business skills
First, some of our interviewees had been under-prepared for the realities of self-employment. While they were skilled at their professions, most of those we spoke to did not have the full set of business skills needed to ensure self-employment is sustainable and profitable.
People looking to start and grow a business need to have a range of business skills such as understanding how to accurately market, forecast and develop their business. However, even those who are self-employed due to the nature of their job or industry (rather than proactively choosing self-employment), still benefit from having core business skills such as budgeting and financial management.
The Chancellor has recognised and responded to this challenge, announcing at the Budget that Jobcentre Plus would hire new self-employment specialists. Self-employed people claiming Universal Credit will also get business mentoring support in future.
But it’s only a first step; to give self-employed people the best chance of success Citizens Advice would like to see the expansion of free or low cost business skills courses for all self-employed people. This would give people the key skills to help ensure self-employment is, and remains, a viable option for them.
Signposting to debt advice
Second, when looking for debt advice, in common with employees and other people in debt, we found that self-employed people tend to turn first to friends and family for advice – and would only seek formal debt help and advice when things reach a crisis point.
“I started noticing behaviours in myself, anxiety, depression, not wanting to go out, not wanting to face things. I am becoming less and less sociable, as in not even wanting to talk to people on the phone.” Mark, landscape gardener, Swindon.
Instead of seeking help, many of those we interviewed started working longer and longer hours to try to work themselves out of debt. Keen to succeed, some also believed that if they worked hard enough, business will pick up imminently. All of which means they waited longer to access help and advice. With this in mind, we suggest that debt advice agencies work with closely creditors to reach out to self-employed people to raise awareness of free-to-client help and advice. This may encourage them to seek debt help earlier. In practice, this could mean lenders routinely providing information and signposting to free-to-client debt advice services when a self-employed person applies for a credit product even if, at that stage, the customer does not need help.
Responsible credit products
Third, we found that most self-employed people have an uncertain, fluctuating income. They miss out on the national living wage, sick pay and other entitlements that employees receive. But as well managing on an insecure income, many will experience unexpected financial shocks, such as illness, a sharp downturn in business or relationship breakdown. These may prevent or restrict the amount of work they can do, which in turn, will significantly reduce their income. When self-employment leads to debt it can have a catastrophic impact on families – particularly if the self-employment had been funded by redundancy money or credit. They have no financial cushion to fall back on, and no accessible credit.
Self-employed people working in skilled trades may face particular challenges as many have additional expenses of on-going, often significant, overheads such as equipment and renting a workspace. Some of these people may benefit from access to responsible credit, either to tide them over or to invest in essential equipment to enable them to continue trading.
Some of those who are more financially stable may also benefit from specialised mortgage products – which is where new products like those developed by Newcastle Building Society come in. However, the market isn’t yet well enough developed – our polling found that nearly a third of self-employed respondents had been turned down for credit which they knew or suspected was due to their self-employed status. The development of responsible credit products tailored for self-employed people, that do not exclude them on the basis that they are self-employed, is vital to help these small businesses to grow.
You can find out more about our research and what we found in the full report, ‘Going for Broke: How self-employed people move in and out of debt’. Our secure self-employment campaign is calling for simpler and more responsive policies that give self-employed people the security to plan and balance their lives, while developing their business. Citizens Advice does not endorse or recommend specific financial services or products.