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Lack of business savings puts SMEs at risk

New research has found that many self-employed workers and small businesses are holding inadequate amounts of cash savings, leaving them with no financial safety net.

A survey by specialist bank Aldermore has found that more than one fifth (22%) of businesses have no cash savings; and 40% of those polled hold less than £1,000.

Fewer than one in ten of those firms with a turnover of less than £10,000 hold more than £1,000 in savings. Some larger businesses are also at risk, with 8% of firms with a turnover of £50,000 holding nothing in cash.

The research also shows that businesses in both the North and Midlands have, on average, £500 in cash holdings, compared to £3,000 in the South. The median average across the UK is £1,000 in cash savings.

Among the self-employed, 34% have a business turnover of less than £10,000 a year before tax; while 24% generate a turnover of more than £50,000. Over half (53%) bring home a salary of less than £10,000 before tax with only 15% taking a salary of over £30,000.

Aldermore has warned that business resilience is tested when the self-employed face unforeseen events, especially ill health. More than half (54%) of those polled said they have had periods when they were unable to earn money because of ill health. Of these, 48% were off work for more than a month and 22% said they lost over a third of the working year.

Ewan Edwards, Aldermore’s head of savings, said: “Starting a new business is a significant life decision. While many self-employed people relish greater flexibility and control, the first few years can often bring long hours, additional stress and relatively small financial rewards. Quite often, issues that can affect the ability to earn, such as ill health or childcare mean that many businesses are failing to prepare financially.”

Aldermore said it wants to work with the Government to help them devise new policies and financial products that will encourage start-ups and protect growing small businesses from the shocks and uncertainties of self-employment. An Entrepreneur ISA or Small Business Savings Allowance, it said, could support many businesses facing financial ups and downs throughout the year.