Linda Edmonds launched her small business at the start of the credit crunch and has struggled to build sales despite excellent customer feedback.
Linda, 47, who won the Jane Asher Home Baker of the Year competition in 2007, visits homes as the Cookery Angel and cooks with parties of children, teaching them how to use top-quality ingredients and to make favourites such as cupcakes and pasta.
She says that because of a shortage of bookings she is doing cleaning work to pay off her business and car loans, plus insurance costs. “I clean for 18 to 19 hours a week at £9 an hour. I’m lucky because my client is flexible and allows me to work around my parties. “It tides me over but I want to be doing at least three cooking parties a week and would like advice on getting more business. Luckily, I have low overheads and already have a decent car and all the cooking kit I need.”
Her income covers repayments of £250 a month on a £5,500 business loan from Barclays (arranged with the help of an initiative from the bank and Leonard Cheshire Disability) and £152 a month on a car loan. Both debts should be cleared within three years. After public liability insurance — necessary because Linda works with children — and assorted costs, she draws a “nominal” salary of £40 a week.
This means that she and her husband, Ian, are dependent on his income as an operations analyst (which brings their joint income to £33,000) to cover the mortgage on their Victorian cottage in Brentwood, Essex, as well as household outgoings. The couple cashed in a mortgage endowment worth £27,000 this year to fund several home improvements.
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Linda says: “We put in new sash windows and doors, redid the plastering and flooring, and bought new wallpaper, banisters and a wood-burning stove. It’s looking wonderful, and we have no plans to move elsewhere.”
About £11,000 of the endowment cash was left over. Linda and Ian put £10,000 of this towards clearing their mortgage — a tracker with Halifax, now at 2.48 per cent — and plan to use the rest to do up their garden.
Linda says: “There’s £67,000 left to pay on the house and we would like to clear that within 9 to 12 years. We understand that we can link an Isa to our mortgage and would like to know whether that is something to consider. If so, we would put about £350 to £400 a month into the Isa.”
The couple have no savings and would also like advice on building a safety net for retirement, although neither has much faith in private pensions. Linda says: “I don’t have a pension and Ian has one through work that isn’t worth much. We would like to put aside what we can, but probably in savings products such as Isas. We like that they are tax-free and seem to offer a reasonable return.” She adds that they already live frugally. “We don’t go out much; the odd pub lunch and a curry every six weeks or so. We haven’t been on holiday for years. The areas where we do spend are on our dogs Albie and Tucker, and on food.”
Costs for the dogs include insurance at £45 a month, and hydrotherapy for Tucker, a ten-year-old Jack Russell, who has a leg injury, at £20 a month.
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Linda and Ian also “eat like kings”, enjoying good ingredients sourced at local farm shops. Linda says that she shops around for essentials at supermarkets, but is not willing to scrimp because food is her passion.
Apart from clearing the mortgage and planning for retirement, the couple would like to be able to pay for more treats, such as holidays.
Linda says: “Our tenth wedding anniversary will be in May 2011 and we would love to go back to the resort in Halkidiki, Greece, where we spent our honeymoon. It would cost about £2,500-plus to do it properly, but would mean so much.”
What the experts say
Small business: Leonore Lord Leonard, Cheshire Disability
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Linda should get help on how to network effectively. Smarter Networking has a range of excellent resources at magicofnetworking.co.uk. She should dedicate time to networking every week with the help of well-established organisations such as the Essex Chambers of Commerce, the Federation of Small Businesses, Women in Business, BNI UK and small informal parenting groups.
She should also make use of digital media including blogging, LinkedIn, Facebook and Twitter to raise the profile of the Cookery Angel.
She should remember to update the website often and should consider search-engine optimisation to drive traffic. She could also place online advertising on cookery websites. Another way to raise the business’s profile is to be available for comment in the local press, radio and at events.
She could also consider giving cooking tips to children and parents in regular newsletters or talks, as well as short workshops in school holidays. It might help to set up mutually beneficial partnerships with companies that complement the Cookery Angel — perhaps local photographers and party planners.
Action plan
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Network more.
Improve online presence.
Offer holiday workshops.
Financial Planning: Dennis Hall, Yellowtail Financial Planning
Linda should check her state pension entitlement based on her overall national insurance contributions. If there is a shortfall she should consider making voluntary payments and back payments where possible.
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Linda and Ian should convert their interest-only mortgage to a repayment mortgage. Over 12 years at an assumed interest rate of 5 per cent, an interest-only mortgage would cost £279 per month compared with £620 for a repayment mortgage. The difference is £341 per month.
A repayment mortgage will be repaid at the end of the term (provided payments are maintained), whereas an interest-only mortgage is subject to how well the investments have done over the term. If the surplus £341 were invested in an Isa, the couple would need an average return over the term of almost 5 per cent — after tax and charges — to repay the mortgage. By comparison, the annual return from the FTSE 100 over the past ten years (including reinvesting the dividends) has been the equivalent of only 1.15 per annum. However, the couple’s first focus should be building up three to six months of expenditure that can be accessed in case of an emergency. A cash Isa would be ideal.
Action plan
Check state pension entitlement.
Convert mortgage from interest-only to repayment.
Build rainy day savings.
Mortgage: David Hollingworth, London & Country
The risk-free approach would be to either switch the mortgage to a repayment basis (£67,000 at 2.48 per cent over 12 years would cost £538.42 a month) or alternatively to overpay each month in order to eat into the capital. Overpaying is a good move in any climate but with the base rate so low and the level of equity so key to available mortgage options, it makes a lot of sense to erode the mortgage balance where possible. Using low rates to your advantage is particularly sensible when there is no other repayment plan in place.
The current Halifax deal is likely to carry an early repayment charge during the tracker period but Halifax does allow overpayments of up to 10 per cent of the outstanding capital balance each year without penalty. Linda and Ian have lost the life cover afforded by the endowment policy and so they should review their level of life, critical illness and income protection and add cover as required.
Action plan
Switch to a repayment mortgage or overpay each month.
Review insurance.
Retirement planning: Tom McPhail, Hargreaves Lansdown
As an indication of potential returns, £500 per month invested in a pension — which would cost only £400 per month because of tax relief — would generate a fund of about £155,000, if Linda were to retire at 66. This would produce an income of about £7,000 a year in today’s money.
I suggest that they save into a pension and an Isa. The pension has the advantage of tax relief, but the Isa has more flexibility. It would be more tax-efficient to channel the pension savings into Linda’s pension rather than her husband’s because they are both entitled to a tax-free allowance in retirement of £9,490 a year. This means that she and Ian could build up pension incomes of £19,000 a year and pay no income tax.
Action plan
Save into a combination of a pension and an Isa.
Linda’s response: ‘We’re going to address pension shortfall’
Everything the experts said was spot-on — although it isn’t all straightforward to implement. For example, I am keen to network more, but most events are paid and it takes research to find the best deals.
Also on the business side, I liked Leonore’s idea of starting holiday workshops. And I agree that I should do more online. I’m not sure about Twitter but am thinking of starting a blog at my website (thecookingangel.co.uk). I could use that to offer the regular cooking tips she suggests.
I had a gut feeling that we should be on a repayment mortgage. Given the experts’ comments, we will look into switching to one when our current deal ends. However, the extra spending would mean that we wouldn’t have anything left to put into a private pension. The advice to check our state pension entitlement was a great reminder, though. I have been told before that there was a small shortfall, so now would be a good time to address that. We will also aim to build some emergency savings.