Dealing with the spiral of debt

Owing money can feel paralysing as the nightmare solution of bankruptcy looms. Nigel Huddleston offers insights and practical help.

Britain has become a nation of borrowers. Bank of England figures show that the collective outstanding debt in 2005 was £1.16bn - more than double the figure for 10 years earlier. And outstanding credit-card debt increased by more than four times in the same period, to just under £60m.

This debt spiral is also increasingly affecting a number of pub licensees. Paying rent, wages, tied-beer prices, utility bills and their own living costs can prove to be an enormous struggle in a shrinking pub market, where consumers are increasingly prepared to forfeit their night out to save a few bob.

One anonymous licensee explained that his credit-card bill of £20,000 was a result of paying day-to-day living expenses because his pub didn't generate enough profit to pay adequate wages for him and his wife.

He claims that spiralling pubco rents played a big part in building his debts, eventually driving him out of the trade altogether. "Never again - unless I get a freehold," he says. "The reality is that we have not made a profit in three years. I always expected to work to supplement our pub living, but not to support it. I can cope with the hours and hard work, but the lack of financial reward is a killer."

Sue and Charles Cawood wanted to tell their story as a cautionary tale. "We want to make people aware of the financial implications of walking through the door of a pub," says Sue. "Even if we only prevent one person getting into our situation, it's worth it."

The Cawoods bought the Royal Oak, at Watchfield in Oxfordshire, in October 2002.

When they handed back the keys just under two years later, they had sunk their £36,000 nest-egg into the pub, spending £17,000 to upgrade the kitchen, £11,000 on a deposit on the lease and £8,000 on a subsequent court case about whether they should have to pay the remainder of the originally-agreed lease price in a disagreement over the valuation.

In that short time, they also negotiated to borrow £51,000 in personal loans and re-mortgages on two houses they owned just to keep the pub business afloat.

Two years down the line, they are still paying off those debts, plus a £4,000 VAT bill.

Unfortunately, the Cawoods' story isn't untypical - the Bank of England says that the average debt in 2005 for a married couple was just over £35,000 - an increase of more than 12% on the previous year.

Business appraisal is vital

Like many who have been stung by the pub game in recent years, the Cawoods' history includes unpayable rates, a business that failed to live up to its promise and high beer prices. It's a trail that leads to the pubcos - they had three different owners in their two years at the Royal Oak - and one that will resonate with anyone who has ended up in debt because they walked in with their eyes closed.

Charles says: "We were naïve and stupid," because the couple stopped short of a full business appraisal and agreed with the previous owner to bypass lawyers on the sale.

So his advice to anyone entering the pub business for the first time would be: "Get a lawyer and a full business appraisal."

Business acumen certainly wasn't lacking for the couple - Charles had run his own construction company in the couple's native South Africa before market conditions forced them to leave, and Sue had worked as an accountant. The Cawoods were attracted into the pub game when Sue was working as a pub chef in Surrey. "That was hard work, but I enjoyed it," she says. Aside from legal wrangles over the purchase of the pub, the local market was at the mercy of nearby Ministry of Defence bases, including military students who riled the locals into staying away from the pub and transient Forces personnel.

Without a loyal customer base, business was tough. "On the first Saturday we had one customer and on Sunday we had two," says Sue.

Charles adds: "We started sending out flyers and eventually the pub became busier. We reached 190 barrels (from about 90), but even at that point it wasn't possible to make a profit because we were tied and paying £98 a barrel for beer.

"Our profit was £50 on a keg if we were lucky. Even doing 15 barrels a month, we were looking at a profit of £750, but our rent was just under £2,000, plus all the utilities. But at first we weren't even making half of that."

Charles worked as a forklift driver to top up the family income, helping out before and after his shifts, but he had to leave Sue and daughter Judith to run the business round the clock.

"There wasn't enough money to pay staff - we couldn't even pay ourselves. Eventually sheer exhaustion set in. I was just in tears all the time, because I'd lost my confidence," explains Sue.

Paying debts

Charles adds: "It was affecting our marriage. In the pub we'd have to be all smiles, but in the kitchen we would be killing each other."

Eventually they had enough and threw in the towel. "Too proud" to do a moonlight flit, Charles found a job as a site manager back in the construction industry and Sue returned to working as an accounts manager.

This major change meant that the Cawoods were able to think about paying debts instead of adding to them.

Taking advice from one of their banks which urged them not to go to commercial debt-

counselling services, the Cawoods made their own arrangements to repay the debts, rather than declare themselves bankrupt.

Charles says: "We wrote a letter to everyone we owed money to, explaining our situation. We told them that we were now working and would repay all our debts, but that it would take time. People were understanding and we kept them informed." The couple's joint salaries are enough to help them back on track. "We're lucky," says Sue, "but some people don't have that kind of income to pay off their debts. My advice to anyone in this situation would be to get a permanent job and inform the bank. If you are upfront with them, they will be helpful."

Charles outlines some of the warning signs for other licensees: "If you can't afford to pay your bills, employ staff and pay them and yourself the minimum wage at least, you're in trouble. And if you find yourself breaking the law, staying open late [pre-Licensing Act] to make an extra £20 from a few guys who want a lock-in, you're in even more trouble."

l Next week Mike Bell, founder of the Freedom for Pubs Association, gives his reaction to debt in the industry.

What action can be taken to deal with debt?

Countless debt-counselling services

advertising on day-time TV and in national newspapers will make arrangements to repay your debts but demand a lump sum in return - not necessarily what you need right now.

A recent Which? report concluded that such organisations gave partisan advice intended to bolster the company's profits rather than help clients.

Free advice services such as Business Debtline and Consumer Credit Counselling Service (CCCS) perform the same

function, without getting you deeper into the mire. These services are funded voluntarily, sometimes by leading financial institutions and consumer-goods manufacturers, who make their money from interest on debts or frivolous spending, and in whose interests it is to minimise troublesome debt.

Business Debtline received 22,000

helpline calls in 2005 and expects an

increase to 30,000.

CCCS drew up just under 31,000 debt-

management plans for clients in 2005 - a figure that doubled over the previous two years. However, it says that these figures reflect the growing awareness of help

available and declining stigma about debt, as well as the increase in the numbers of people finding themselves in trouble.

The organisation says: "Although [the figures] represent people with significant financial difficulties, they also demonstrate the increasing number of people who are finding solutions to those di