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Fragile cash flow threatens small firms driving recovery

  • 07/10/2014
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Small firms may be mastering digital and strategic innovation but when it comes to their finances, many rely on credit cards and overdrafts.

A study by AXA Business Insurance revealed 45% of businesses use credit to ease cash flow with many more using overdrafts than a government lending scheme.

AXA’s research found that only 12% 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% from a government grant or loan. By comparison, 24% turned to their credit card, 27% – an overdraft, and 18% received the money they needed from family and friends.

The research suggested around a third of small business owners take home less than £10,000 a year from their businesses. Similarly, 28% do not take a regular salary but take lump sums as and when cash flow allows.

In terms of salary range, 38% 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. Only 20% of all business owners take home over £150,000 a year with just 2% declaring an income of £150,000 or more a year.

On savings, 50% of businesses have 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, said AXA.

Over half 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.

Darrell Sansom, managing director at AXA Business Insurance, said: “Small businesses are the future: sole traders and entrepreneurs with just a handful of staff now make up 95% 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.”

Dillen Iyavoo, CEO of crowdfunding platform Funding Tree, said: “The lending apartheid facing UK businesses has never been as strong. Small businesses are the engine room of the economy, and currently they are being starved of the fuel they need to operate and grow.”

The Department for Business, Innovation and Skills estimated that there were 4.9m private enterprises in the UK at the start of 2013, with 4.7m of these falling into the ‘small business’ category with fewer than nine employees.

Tips for business from AXA

  • 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.

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