Charley Child thought she had planned for her new business.
But despite saving for a full year before giving up her job as a fashion buyer to start her knitwear brand Iggy & Burt, she was living far beyond her means.
With the business yet to take off and all her savings tied up in start-up costs, she relied on credit cards to get by – quickly building up £15,000 worth of debt.
She explains: ‘Essentially our household going went from two to one. I was 27 years old living in South London, with very little money, but hadn’t quite adjusted my lifestyle to the change in income and credit cards were what saw me through.’
Charley realised that to help her business take off, she needed to clear her own debt and change her lifestyle.
For people like Charley who run their own business, work freelance or are self-employed, you don’t always have the same regular stream of income you get when you work for someone else.
Debt is a problem for many self-employed people. Figures from a charity for people working for themselves Business Debtline in 2018 show that over half of those who contacted them now have debts of more than £10,000, with 23% owing more than £30,000.
More than six in 10 callers said they had used personal credit to pay for business costs in the last two years.
Some months, self-employed people can earn a lot and other months, almost nothing. Some times they could be expecting a big payment that sees them through that month – but if it never comes, they have no way to pay the bills.
If you are sick and can’t work, the business might have to stop and you end up with another unexpected gap.
If your income is irregular, taking on credit can be an option that some people take to see them through.
But what if something else happens the next month and soon you find your debts spiralling, like Charley.
There are of course two types of debts when it comes to your business – money that the business owes, and then personal debts that you owe, which may be because there is not enough money to pay yourself.
Charley was able to pay her personal debt quickly and learnt to live on a lower income while she started the business.
She explains: ‘I had a life overhaul for a year. I started a household budget that I checked religiously each week.
‘I changed over all the cards to 0% interest credit cards and worked how much I needed to pay a month.
‘I started small – I planned all my meals each week to cut our weekly shopping bill in half. I got rid of all subscriptions bar Spotify.
‘I swapped out all my lovely branded skincare to more affordable stuff. I changed how I had my hair to stop expensive straightening treatments. I looked at every aspect of my life.
‘Spontaneity went out the window – there were no meeting up for a few drinks here and there.
‘The apps for me were lethal, I stayed away from Uber, Just eat, anything like that. I completely shut down on Facebook and Instagram because I just wanted to buy stuff I saw on there all the time.
‘For me getting rid of any debt was about dedication to the business and being self-employed so it didn’t really feel like a sacrifice.’
Cutting back on spending is important if you are self-employed, especially in the initial stages of a new business
You should try to create a safety fund and don’t be tempted to overspend just because you’ve had a really good month.
Always have a few months worth of savings for when things are quieter.
Charley adds: ‘Treat yourself like a business and check your cash flow and budget every week.
‘Look ahead as much as you can, but also look back at the costs that arose in certain months to help with future planning. And save about 25% of what you have earned as a back-up plan.’
Although you may have the idea to start a business, you might not have the skills and experience to manage your finances.
Business debtline found that only 59% of callers knew how to complete a business plan and only 47% were confident about completing tax and VAT returns.
Part of being self-employed is getting to grips with these things and if you don’t understand them, ask for help and advice.
A huge unexpected tax bill can completely knock you back and it’s important to factor it into your budget.
Mike Parkes, Technical Director at GoSimpleTax, a self-assessment tax software, said: ‘There are many challenges which you’re faced with when you’re self-employed. It is no longer about just being an expert within your own industry, and you are quickly forced to establish a well-rounded business knowledge to stay afloat.
‘If you fail to do this, it can be the difference between making self-employment work for you or your business failing at an early stage.
‘As the HMRC advertising campaign said “tax doesn’t have to be taxing” but the facts are that it can be and can certainly cause stress when juggling so many different elements of your business and working for yourself.
‘The key is to make the self-assessment process as simple as possible. From knowing when the deadlines are to the right amount you need to set aside for your tax bill.
‘These people need to ensure they’ve made provisions for tax throughout the year. We would urge those sole traders filing a tax return to keep good records as you go and to utilise the technology now available to them.
‘Crucial to avoiding debt is ensuring they put away a minimum 15%, maybe more depending upon the nature of the business, of sole trader earnings to help cover their tax bill and avoid any nasty surprises.’
Beyond personal debt, sometimes taking on debt for the business is necessary to help it grow.
This is something that should be done with careful planning and care to make sure it is something you can repay.
Hannah Cox, 35, from Manchester, recently took on a business loan as she wanted to grow her business BetterNotStop, which offers travel experiences for entrepreneurs, founders and freelancers.
Hannah researched and thought carefully about her plans before she committed to anything.
She had experience of debt as she had paid off over £20,000 before starting the business.
She explains: ‘I ended up in debt living a few hundred pounds a month beyond my means as a student, then struggling to find a job in London once graduated.
‘Despite my degree, I worked as an intern for £100 a month, sleeping on a friend’s floor, then in a low paid marketing job.
‘I struggled to pay off enough with my salary, despite doing everything I could to save money – packed lunches, walking to work you name it! Before I knew it a loan and few credit cards had amassed to nearly £20,000.
‘I consolidated it into an IVA, moved out of London to have a lower cost of living and started to work for myself so I had more control on how much I could earn and pay back.’
Now, she admits that taking on debt again has made her feel sick but she feels like this time she knows what she is doing and it is for the sake of growing her business, rather than for keeping up spending she can’t afford.
She adds: ‘I feel alot more in control of it – its one business loan (which I am a personal guarantor for) which, even if everything goes wrong with the business, I know I can afford to pay it back quite easily, as I live within my means currently.
‘It’s affordable and much less stressful.’
So can you avoid debt if you are a freelancer or self-employed?
Of course it is possible with careful research, budgeting and planning.
But you shouldn’t be totally afraid of debt either. It’s about ensuring that any debt you do take on, is for the right reasons and is something that really is affordable, even if your circumstances change.
There is support out there for people who are self-employed. Business debtline, run by the Money Advice Service, offers advice for people who work for themselves.
But although Hannah says there is advice available online, Hannah feels that more needs to be done to ensure that those with ideas for businesses have the support to survive while they get it off the ground.
She says: ‘There needs to be more information and support from the Government in the help offered to self-employed people, especially when it comes to managing your finances, taxes and accounts.
‘This should all be online and offline training to make it accessible as possible and of course, available for free.
‘It’s the same issues new freelancers and self-employed people have year after year and yet still it’s not being dealt with.’
Joanna Elson OBE, chief executive of the Money Advice Trust, the charity that runs Business Debtline, agrees. She said: ‘Many of the people behind these businesses are in need of advice and information at an earlier stage of their journey.
‘There is support out there but the government needs to do more to proactively champion these opportunities to ensure that these businesses receive the help they need to succeed.’
This article is part of a month-long focus in November all about debt.
Scary word, we know, but we're hoping if we tackle this head on we'll be able to reduce the shame around money struggles and help everyone improve their understanding of their finances.
Throughout November we'll be publishing first-person accounts of debt, features, advice, and explainers. You can read everything from the month on the Debt Month tag.
If you have a story to share, a topic you want us to cover, or a question that needs answering, get in touch at MetroLifestyleTeam@Metro.co.uk.