Self-employed in thousands of debt – here are the causes, and how to avoid it

New research from charity Money Advice Trust has shown that the self-employed could be falling into tens of thousands in debt.

Money Advice Trust run Business Debtline. They've seen an increase in the number of calls, as well as the levels of debt small business owners have fallen into trying to keep their businesses afloat.

• Late payments increase by £1 billion in six months
• What type of business insurance do I need?

Nearly half of small businesses with debt have over £10,000

Over the last year, 49 per cent of people contacting Business Debtline had debt totalling over £10,000, while 23 per cent owed over £30,000.

Across 2017, Business Debtline helped 36,000 small business owners and sole traders with their financial difficulties.

It’s estimated that around 15 per cent of the UK workforce is now self-employed. The report suggests that as this number grows, more support is needed to stop businesses from falling into debt.

What causes small business debt?

The research found that there were three main factors that caused small business owners to fall into debt. Those were:

• Low and irregular income – of the people that called Business Debtline last year, 39 per cent had a gross annual turnover below £25,000, while around 60 per cent had used a personal credit card to tide over their business expenses.
• Late payments – 45 per cent of callers said they'd experienced problems with late payments and were uncertain of when the money they’d earned would arrive.
• Lack of essential business management skills – while many people are keen to jump into self-employed life, the research found that a lot of the problems were caused by small business owners simply not having the skills they needed to make things work. 59 per cent weren’t confident about making a business plan, while 47 per cent weren’t sure about tax returns.

Tips to avoid business debt

While sometimes circumstances mean that debt is unavoidable, you can take some steps to lower the risks that Money Advice Trust have highlighted.

• Start saving – before you launch into your business, make sure you have a healthy savings pot for when times are lean. If you’re already in business, try to put away a little extra when you have it to spare.
• Don’t quit your day job – while many people go self-employed to escape the rat race, it may be worth edging into your business slowly. See if you can reduce your hours at your current place of work while you build things up, so you have a safety net should things go wrong at the start.
• Set expectations – when taking on new jobs, be clear with clients about when you expect to be paid and what the process will be like. It won’t completely solve the problem, but should mean fewer people do pay late.
• Know your legal rights – if people don’t pay when they should, make sure you know how to get what you're owed. Having a late payment letter template and plan in place is a great first step.
• Upskill – whether you’re in business already or just starting out, make sure you have the right skills to keep things running. Our Knowledge centre is full of articles and guides to get you started, such as how to go self-employed, how to fill in your tax return, and how to write a business plan.

Have you had a problem with debt since going self-employed? Let us know in the comments.