Are UK SMEs building their futures on a financial house of cards?

While these businesses are leading the world with 21^st century innovation, their finances are too often based on credit cards and overdrafts, reveals the insurer.

The study by AXA Business Insurance, found that around a third of small business owners take home less than £10,000 a year from their businesses. Similarly, 28% do not pay themselves a regular salary but take lump sums as and when cash flow allows.

For the current tax year, most business owners told AXA that they do not see this situation changing 59% said they expect income levels to remain the same. That is mitigated by the 27% that expects better take-home pay by April of next year.

Credit cards and overdrafts are a prime survival mechanism for small businesses: 45% of businesses use them to cover fluctuations in cash flow. The same pattern is seen when they seek funding for growth a small business is still more likely to access it from an overdraft facility than from one of the flagship government schemes.

AXA’s research found that only 12% of small businesses had accessed funding in the first two quarters of this year: of these, 8% 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.

AXA has also found that many small businesses are also poorly insulated with savings that could tide them over an unexpected setback: 26% have less than £1,000 in savings, and a further 24% – 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.

Over half (53 %) of small businesses requiring employers’ liability insurance by law have failed to buy it. 43% 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. Finally, more than half of those who provide advice cover themselves for negligence claims with professional indemnity cover.

Darrell Sansom, Managing Director at AXA Business Insurance, commented:

“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.

Businesses need to know that there are government funding schemes they can benefit from, what kind of insurance they need and why it’s needed, as well as getting information on the financial practices and tools available to tackle common risks.”