Breadline entrepreneurs tumble into benefits trap
Faisel Rahman, UTV Business
For nine years, Janet was in and out of work, desperate to be in control of her life and financially independent. She’d recently been earning a little extra by making shoes and jewellery for friends and family, so she came to Fair Finance to borrow some money to set up the business properly.
Running a business while on benefits is illegal, so she had to be able to make enough money to cover council tax, housing benefit and living costs, after paying for the business. For Janet, it meant generating an immediate turnover of about £4,000 a month, but we figured that would take six months. She must fill out a self-certification form every time her income changes – in her case, monthly – and could potentially receive some housing and council tax benefit, but processing payments could take up to three months.
Over the last few months, with fewer jobs available, there has been a steady rise in the number of very small and start-up businesses coming to us looking for help. Many need immediate funding as banks have been reducing overdrafts or turning them into more expensive loans. But some of these entrepreneurs are only looking to grow a modest amount, so they can fulfil the dream of being their own boss and not relying on others.
The amounts needed are small – around £5k to get an idea off the ground and build up some experience. Loans this small are credit-scored by banks, so our clients usually fail, or the sums are dismissed as too negligible to create a ‘meaningful’ business.
But the biggest barrier seems to be the harsh benefits system. If Janet’s business didn’t work out on day one and she didn’t find enough money to cover the rent, she’d be served with a notice seeking possession within two months, and then probably face eviction. Signing back on would take two months, so unless she signed on the same day as she signed off, she’d be in the same position. Becoming an entrepreneur is a tall order for someone living on the breadline.
The first year of any business is crucial as things always take longer than planned. We’ve seen far too many entrepreneurs stumble while making the transition and fall into unsustainable debt in order to meet living costs. They don’t need financial or debt advice, they need a supportive system.
In the UK, the New Deal for the self-employed offers only £50 a week to people moving off jobseeker’s allowance for the first four months towards covering all living costs. And most public-funded support is for businesses looking to grow quickly, rather than small businesses.
Ireland and the US offer two different approaches that make our government’s seem woefully inadequate.
In Ireland, entrepreneurs moving off benefits can take advantage of the back-to-work scheme that gives access to a business adviser. You also receive 100% of your welfare in the first year, 75% in the second, 50% in the third and 25% in the fourth. If your business fails, the safety net catches you and puts you back on 100%. If the business succeeds, you come off benefits and start paying taxes.
In the US, where welfare is much lower but entrepreneurship more respected, the government recognises self-employment as a route out of poverty and has dedicated over $100m (£61.4m) of its stimulus package specifically to non-bank microfinance organisations to help create and fund business opportunities for the unemployed.
Much of our government’s recent rhetoric has been around the need to reform the benefits system to encourage people back into work or reduce payments; too little has focused on entrepreneurship and opportunity creation. According to Global Entrepreneurship Monitoring, the UK has one of the lowest rates of entrepreneurship among G7 countries. With the latest unemployment rate at 7.6%, maybe the government should be looking at progressive, rather than punitive, measures that can offer people a real route out of poverty.
With Janet, we made the loan and, technically, she started trading illegally. But she is now making enough money to get off benefits – and pay taxes.