Self-employed vulnerable to credit card debt, study shows

By Marianne Curphey

Striking out on your own as a freelancer or business owner has its risks -- and one of them may be piles of debt, research from StepChange Debt Charity has found. Here's why the self-employed are particularly susceptible to debt -- and what they can do to stay out of it.

Debt load heavier for self-employed
The November 2012 study, conducted for StepChange by the University of Bristol's Personal Finance Research Centre, found that credit card, overdraft and personal loan debts were higher for the self-employed.

In 2012, the average credit card balance across all StepChange clients was £10,517 -- but for the self-employed, the average was more than £17,000. Why this big difference? The main reason, researchers concluded, is that self-employed people who ask the charity for help tend to have lower and less reliable incomes than employed people.

Over the past year, StepChange found, households that depended on the earnings of a self-employed individual had seen their income fall 6%, from a monthly income of £874 to £825. Compare that with the 1% decrease for households dependent on full-time employment (from £2,626 per month in 2011 to £2,600 in 2012). self-employed-debt

Why are the self-employed so deep in debt?
Researchers' in-depth interviews with clients of the charity found that a common reason people become self-employed is redundancy. Because so many are pushed into self-employment after losing a job, the decision to become self-employed is often a last-minute one. That may cause many to bite off more than they can chew, says Una Farrell, spokeswoman for StepChange.

"Being self-employed is much more than just the actual job," she says. "It is about being able to market yourself, chasing up invoices, etc, all of which can be quite complicated. One of the problems is that people who would not naturally opt for self-employment were forced into working for themselves because they had lost their job and feel that there is no other way out."

When the venture doesn't succeed, the newly self-employed often find themselves using credit to keep the business afloat. As many used credit (and, often, their unemployment income) to start the business in the first place, the debt load then becomes unmanageable.

Debt-avoidance tips for the self-employed
Funding your business the right way, rather than the easiest way, is key to staying out of debt, says Jon Norris, editor of Freelance Advisor, a blog and information site for self-employed people.

Credit cards, he says, are the most common way to get funding and are therefore the first place fledgling businesses often turn. Yet other options exist, including government-backed lending schemes, large corporate "accelerator" programmes to help new businesses, and crowd-funding websites such as FundingCircle or Kickstarter.

"Better deals can be had through business loans or crowd-funding websites," Norris says.
"But both of these take time -- credit cards are instant satisfaction."

When it comes to better sources of funding, however, things can be tough for the newly self-employed. Entrepreneurs who borrow with credit cards often do so out of necessity, says Dawn Whiteley, chief executive of the National Enterprise Network.

"Small businesses and particularly the self-employed find it difficult to access mainstream financing and bank lending, and so credit cards and personal loans are quite often the only ways in which these businesses can be financed, either at start-up or on an ongoing basis," Whitely says.

Credit card borrowing can be a lifeline for start-ups, Norris says, but the self-employed need to plan ahead and ensure their cash-flow is healthy enough to keep up repayments. If you must turn to credit cards, be sure to use them only in the ways in which they are devised -- short-term flexible funding, where repayment can and will be made promptly.

The most important debt-evasion tactic, however, is separating your business's finances from your personal finances. That way, if your business fails, it won't drag you and your family along with it.


"The best thing a freelancer can do is incorporate their business," Norris says.

This keeps your business and personal finances separate and means you stand to lose only what you've invested if your company goes under. A sole trader, by comparison, could lose everything.

"We have a specialist department for self-employed people because their affairs can be so complex," Farrell says. "Often their personal and business finances are tied to each other, and it can be a problem if they are using their personal savings to bolster their business. If the business fails, then they can be in serious trouble with their personal finances as well."

Self-employed doesn't always mean struggling

It's not always the case that self-employed people struggle with debt and below-average incomes, Norris says.

 "A survey we conducted showed most [self-employed] people have maintained or increased their income in the last year, and another study just last month showed freelancers' average income is twice that of full-time employees," Norris says.

In fact, he adds, freelancers have been in a really good position during the recession, as many companies are cutting permanent staff but still need their skills -- and therefore retain them as freelancers.

If you do find yourself self-employed and struggling, however, know where to turn for advice. A variety of charities offer free debt advice to self-employed individuals. Organisations like StepChange Debt Charity  and National Debtline are good places to start.  

See related: Credit cards can make -- or break -- small businesses, Businesses using credit cards to pay tax bills

Published: 18 January 2013