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Going for broke: how self-employed people move in and out of debt

15 March 2016

Going for broke: how self-employed people move in and out of debt [ 1.2 mb]

Self-employed families are nearly twice as likely as families where all adults are employed to be behind with a household bill, and also more likely to be in poverty (measured as 60% of median household income). Self-employed families also have larger mortgage debt than employees, and a slightly greater share report that their mortgage payments are a heavy burden.

Self-employed people who experienced debt were less likely to have planned and prepared thoroughly before they went into self-employment.

Start-up costs were sometimes funded from redundancy payments or credit obtained while in employment. Many of those who ended up in debt found that business went well, initially, and they felt optimistic that their business would continue to grow. Not all of our participants used ‘good times’ to save for the future. Unexpected financial shocks, (such as illness or relationship breakdown) prevented some from working or restricted the amount of work they could do. These situations could be difficult to manage and, for some, the lack of a financial cushion to fall back on led to debt. In these situations, debt advice taken early could have helped to reduce the impact of such shocks.

As previous research has shown, some people can find debt difficult to cope with and it can impact on their wellbeing and relationships (University of Bristol Personal Finance Research Centre. Understanding financial difficulty: Exploring the opportunities for early intervention, 2011). So how do the experiences of self-employed people in debt differ from others? Our analysis shows that self-employed people are slightly more likely to find debt a heavy burden than employees (the proportion of people reporting that their debt is a heavy burden reaches just under a quarter (24%) amongst self-employed people aged 45-54, compared to 21% of employees in this age group). In order to cope, we found that some self-employed people start working longer and longer hours to try to work themselves out of debt.

Since self-employed people tend to work alone, being in debt can feel particularly isolating, and working long hours means spending less time with friends and family. Our findings suggest this means they are less likely to talk to anyone about their debt, and may not be aware of the formal debt advice and solutions available. This, coupled with the fact that some people believe that work will pick up imminently, means that they wait longer to access help and advice.

In terms of accessing support, most of our participants turned to family and friends in the first instance to tide them over financially and for advice. We found that those who accessed formal debt services tended to seek it only once they were in a crisis situation. While this is similar to other people’s experiences of seeking debt advice, the options for self-employed people are limited, due to their uncertain income.

Looking to the future, many of our participants were optimistic and, mostly, pragmatic about the future. While some had decided to leave self-employment, others had set themselves a future review point to consider whether or not to continue. Others were coming up with creative solutions, such as diversifying their business.

Going for broke draws on new analysis of national data, in-depth qualitative interviews and survey research to explore the causes and impact of debt among self-employed people. We found that self-employed people experience personal debt differently to the general population, and we would suggest that there are a number of opportunities to improve security for self-employed people in this area:

  • Recommendation 1: Expansion of free or low-cost business skills courses for self-employed people.

  • Recommendation 2: The creation of one-stop-shop advice for self-employed people to get advice about business-related issues.

  • Recommendation 3: Development of more responsible credit products tailored for self-employed people that do not exclude them on the basis that they are self-employed.

  • Recommendation 4: Debt advice agencies to work with creditors to reach out to self-employed people to raise awareness of free-to-client help and advice.