Removing barriers to mortgages and pensions for the self-employed could help boost entrepreneurship and drive economic growth, according to the Federation of Small Businesses (FSB).
A new report by the FSB highlights the financial struggles faced by entrepreneurs, particularly in securing mortgages and saving for retirement. The organisation argues that addressing these challenges could unlock the full potential of the UK’s small business sector and provide a much-needed boost to the economy.
The mortgage struggles of entrepreneurs
A survey of over 1,300 self-employed people, conducted by research agency Verve in October and November 2023, revealed that a quarter (25%) of respondents found it harder to access a mortgage due to their employment status. Meanwhile, one in six (16%) admitted that funds they would otherwise use to expand their business were being diverted towards mortgage payments.
In addition to mortgage struggles, entrepreneurs are relying on various forms of financing to keep their businesses afloat, including:
- Bank overdrafts (17%)
- Credit cards (16%)
- Financial support from family and friends (9%)
The FSB claims that personal guarantees, which make borrowers personally liable for business loans, are being overused by lenders, stifling business growth and discouraging entrepreneurs from taking financial risks.
Pensions are not a priority for entrepreneurs
The survey also found that saving for retirement is often neglected by self-employed workers. More than a third (37%) of entrepreneurs said they do not contribute to a pension, with cash flow constraints cited as the main reason by 32% of those who had not made contributions in the past year.
Unlike employees, who are automatically enrolled in workplace pensions, self-employed individuals do not benefit from employer contributions or tax relief in the same way. The FSB argues that more needs to be done to help entrepreneurs secure their financial future.
FSB calls for mortgage and pension reform
The FSB is urging lenders and policymakers to take action to level the playing field for self-employed individuals. Among its proposals, the organisation is calling for:
- A standardised mortgage application process for the self-employed, making it easier for them to understand what documents they need to provide.
- Encouraging lenders to offer lower mortgage rates to self-employed people who take out income protection insurance.
- Greater regulation on personal guarantees, bringing them under the Financial Conduct Authority (FCA)’s Consumer Duty, to prevent excessive use and protect borrowers from financial hardship.
The Consumer Duty requires financial firms to prioritise their customers’ best interests, and the FSB believes this should extend to personal guarantees on business loans.
Industry and government responses
Tina McKenzie, policy chairwoman at the FSB, emphasised the importance of addressing these financial barriers:
“By solving the finance conundrum too many entrepreneurs find themselves in, we can help to unlock the growth we need to get the economy on track.”
She continued:
“People who take the leap into entrepreneurship are already taking on significant risks. Income volatility adds additional barriers to securing finance products, such as mortgages and pensions. This should not be a reason to deter people from starting their own business.”
McKenzie also argued that homeownership and financial security in retirement should not be privileges reserved for traditional employees, adding:
“Keeping Business Asset Disposal Relief at 14% could help entrepreneurs avoid erosion of their retirement funds. As the Government develops its Small Business Strategy, it must cater to the needs of the self-employed.”
Meanwhile, David Raw, managing director of commercial finance at UK Finance, defended the role of personal guarantees, stating that they can actually help entrepreneurs access finance at lower rates:
“Personal guarantees play an important role in enabling lending to take place. They unlock finance that would not otherwise be available and can lead to businesses accessing cheaper rates. The vast majority of personal guarantees are never called upon.”
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He also reassured self-employed borrowers that mortgage options exist, suggesting that independent mortgage brokers can help navigate the system.
Regulatory and government considerations
An FCA spokesperson acknowledged the findings of the FSB report, stating:
“We will read the report with interest and consider the recommendations.”
The FCA recently announced plans to review mortgage regulations, though some areas of commercial lending remain outside its jurisdiction.
A Government spokesperson reiterated the administration’s commitment to driving economic growth, stating:
“We are going further and faster to drive growth through our Plan for Change, putting more money into working people’s pockets. That means making Britain the best place to start and scale up a business.”
The spokesperson also highlighted efforts to tackle late payments and introduce a fairer business rates system to encourage investment.
Looking ahead
The FSB’s findings make it clear that self-employed workers face significant challenges when it comes to mortgages, pensions, and business finance. With the Government preparing to unveil its Small Business Strategy, entrepreneurs will be hoping that their concerns are properly addressed.
Ensuring that self-employed individuals have access to fair financial services will not only support small business owners but could also provide a crucial boost to the UK economy.
