The Federation of Small Businesses (FSB) has published two reports entitled Access to Finance and Mortgages: Self-Employment Part 3 and Pensions for the Self-Employed and Selling a Business: Self-Employment Part 4.
The research looks at how to improve self-employed people’s access to finance, pensions, and mortgages.
The FSB found that a quarter (25%) of entrepreneurs say being self-employed has made it more difficult for them to get a mortgage, while those who do secure one are often faced with higher rates and less favourable terms.
On top of that, 16% say savings or capital they would otherwise use to expand their business is being used to pay their mortgage.
Entrepreneurs are also relying on various finance options to grow or stay afloat, including bank overdrafts (17%), credit cards (16%), and financial support from family and friends (9%).
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With access to finance so constrained, saving for a pension is at the back of the queue for many entrepreneurs, with 37% saying they do not contribute to a pension, mainly due to cash flow constraints.
The FSB report also highlights that the excessive use of personal guarantees, which make borrowers personally liable for business loans, are stifling growth, with some lenders requiring them for relatively small amounts – dampening entrepreneurs’ willingness to take risks.
The FSB has raised this with the Financial Conduct Authority (FCA) and is calling on the Treasury to regulate personal guarantees.
Calls for simpler mortgage applications
The FSB has called on the FCA to enforce standardised documentation requirements across lenders to simplify the mortgage application process for the self-employed.
It said a standardised approach across lenders would help the self-employed be better prepared when it comes to what information they will be required to provide to a lender.
Lenders could also be encouraged to consider offering lower mortgage rates to self-employed people who have taken out income protection insurance.
Tina McKenzie, FSB’s policy chair, said: “People who decide to take a leap into the unknown by embracing entrepreneurship are taking on many risks – not least that of no longer being able to rely on a secure income.
“Income volatility adds additional barriers to accessing finance products, such as mortgages and external finance for their business, and makes saving for a pension harder.
“The impact of this should be minimised to encourage more people to take the leap without worrying that they will be locked out of common financial milestones as a result.
“The dream of owning your own home is firmly entrenched in our national culture, while we all aspire to a comfortable retirement – but these things should not be a privilege reserved for those in conventional employment.”
