Over the past decade, the number of freelancers working in the UK has dramatically increased. At the end of 2019, the UK government reported that there were over 5 million self-employed workers, a figure that is set to grow as a result of the Coronavirus pandemic.
With several businesses restructuring, making cutbacks and even closing their doors, many have been forced to turn to freelance work as a means of income.
Others have realised the advantages that accompany being self-employed, such as virtual working, flexibility and a good work life balance.
It’s true that freelance work offers attractive benefits. It accommodates working hours that can be planned around commitments like family – something that isn’t always guaranteed with a 9-5 job. The ability to work for yourself also benefits people who feel stifled in their positions in terms of creativity and decision making.
With that being said, there are also drawbacks to this type of employment. As many freelancers will tell you, the single most frustrating aspect of their craft is inadequate access to finance.
Barriers to self-employed business finance
Access to finance has always been challenging for self-employed people. Lending facilities assess applicants in terms of creditworthiness and unfortunately for freelancers, the nature of their employment means they tend to be perceived as higher risk…
Irregular income predictability
Freelancers often have to manage an irregular income. Consistent work is not always a guarantee, and this unpredictability makes obtaining business finance difficult.
Lenders offering financial products like business loans usually require businesses to provide documents such as trading history and bank statements.
When underwriters consider applicants for eligibility, they essentially assess how likely the candidate will be able to pay off any debts. As many of these funding options require monthly repayments, a lack of consistent cash flow and periods of low or no income raise a red flag.
A lack of security
Many business finance products require a form of security in the event of non-payment. This security assures lenders that they will have a way of recuperating their losses if a business fails to pay. Assets that typically get used as security include expensive machinery and equipment.
Insufficient collateral plays a large factor in why applications get denied, and compared to limited companies, self-employed workers aren’t always in the position to offer up such security.
Mixed finances
Some self-employed workers choose not to open up a separate business bank account for their finances. There are a number of disadvantages to doing this, as separate accounts can help with tax planning and bookkeeping.
When it comes to obtaining finance, the absence of a built up business credit history makes it harder for lenders to assess the financial health of a freelance venture.
Sole proprietor liability
Freelancers fall under the category of sole proprietorship, which means no legal separation from their freelance business entity exists. Because of this, a freelancer is completely liable for all debts and losses incurred by his or her business.
As a one person team, it’s likely that there would be no one else to keep the freelance operations running in the event of an emergency, which would also impact the ability for regular repayments to be made.
Alternative finance options for freelancers
In recent years, innovative alternate finance solutions like Penny have entered the market, making it easier for people working in the freelance sector to get access to business finance.
Different funding routes for freelancers include:
Invoice finance
Invoice finance providers help freelancers quickly receive money that is owed to them by clients. By raising money against customer accounts, freelancers benefit from quick access to owed funds.
This type of finance suits people who issue a lot of invoices and experience lengthy payment gaps.
Crowdfunding
The pandemic has resulted in an increased support for smaller, local businesses and freelance talent. For many solo businesses, crowdfunding provides a successful avenue for raising vital business funds.
Platforms like Indiegogo and Patreon offer free sign up for sole traders to advertise their products or skills. Setting up a campaign works particularly well for self-employed individuals in creative fields who are also looking for opportunities to test their market.
Line of credit
Operating similarly to a credit card, a business line of credit provides individuals with a lump sum of money up to a set limit. A sole trader can then withdraw funds as and when he or she needs it, and will only pay interest on the money that has been spent.
This line of credit helps to keep the total amount paid back at a low, and provides freelancers with the assurance of access to funds if their business goes through a quieter period.
The future of freelance work
Freelancers contribute a huge £125 billion to the UK economy and continue to provide vital products and services to fill the demand created by consumers and larger businesses.
As the labour market continues to transform and rely more and more on self-employed workers, it’s important this sector is supported, and able to collect earnings without having to wait through long periods of cash flow gaps.
Penny helps freelancers take control of their cash flow. Click here to find out more.
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