Short-termism is gripping UK small businesses, according to commercial insurer AXA, which has revealed that many are adopting short-term planning and cutting reliance on external funding ahead of Brexit. Staying agile and light is a common strategy, but may not give businesses the best chance of survival if financial cushions are not in place too.
The study* finds a sharp increase in financial anxiety amongst business owners. Over the course of 2018, those reporting they felt chronically stressed** about their businesses increased by almost 50 per cent, reaching 29 per cent by year end. Previous studies have shown that the self-employed tend to be more stress-resilient than other population groups, which makes the recent rise in stress even starker.
While growth and hiring plans are down for 2019, the biggest pull-back is on funding, just 17 per cent of business owners plan to invest in their business this year. This is a fall of 37 percentage points on 2015 when that was 54 per cent, the lowest figure in five years.
Far fewer are turning to banks, government or EU-backed schemes designed to help them too: just 4.8 per cent say they will seek funding from these sources, a three-fold fall on 2015. ‘Under the radar’ finance is vastly preferred, as businesses are now more likely to turn to family, friends, other small businesses and existing personal credit to fund growth.
Small businesses are also tending to defer things like insurance, pensions, savings and business banking products – another sign that many are planning month-to-month rather than for the longer term. AXA’s research found that:
- Three in ten small businesses have no insurance of any kind – a figure that has barely moved in five years. It means a large part of the UK business is not underwritten for common risks, and could potentially be breaking the law.
- Half of small businesses (52 per cent) have no way of getting ‘sick pay’ – either by having staff, sub-contractors or family members who can keep the business going while they are absent, or in the form of a rainy day fund. Personal accident cover, which pays a monthly benefit to cover lost income during recovery following an accident, is taken up by just one in ten self-employed people too.
Seventy-five per cent of small business owners do not contribute to a pension fund, most (57 per cent) citing a fluctuating income as the top reason they cannot pay in. Half of those who are not paying into a pension (35 per cent) say they have alternatives in mind, commonly a mix of property investments, company pensions from old employment, the business (either continuing to work, drawing income from it or selling it’ and state pensions.
Most small businesses – 68 per cent – report that they shore up their business income using personal finance and a variety of informal arrangements. These include their partner’s income, family loans, property investments, state benefits or a current pension (eight per cent currently draw a pension) to paper over dips in income.
Furthermore, digital tax records are a crucial way of forecasting cashflow and tax liability, but are kept by just 45 per cent of small businesses. HMRC remains the biggest creditor in business liquidations in the UK.
The final sign that small businesses feel alone and alienated from sources of support is the number who plan to return to the labour market this year. While 11 per cent of business owners combine their venture with part-time or full-time employment, a further 20 per cent of those surveyed said they are planning to take a job too. This would mean a third of today’s businesses being supported by the owner taking another job.
“Our small businesses are showing signs of stress amidst the current uncertainty. Financial planning and tools are being rejected in favour of short-term workarounds – taking a job when cashflow drops, working through illness or not putting money aside for contingencies. This can make sense in the short term, but can undermine the business’s fitness for survival long term and leave people very vulnerable to shocks. Caution is understandable in these times, but ensuring you are financially fit now will be crucial to weathering any storms ahead.” – Gareth Howell, Executive Managing Director, AXA Insurance.