It seems self-employment is the latest trend in the business world, with more than seven out of 10 small business owners looking to grow their own business rather return to traditional employment, according to a survey by FreshBooks, a cloud-based accounting solution for self-employed professionals.
However, these individuals don't have the easiest path: The Freshbooks data reveals that 85 percent of independent professionals report that business development is a challenge.
"In the next five years, self-employed professionals will make up nearly half of the U.S. workforce, yet everything from health care to America's tax code cater[s] to larger businesses," Mike McDerment, CEO of FreshBooks, said in a statement. "To better serve this market, it's important to understand it."
So what are today's self-employed workers struggling with most? Here are four big challenges identified by FreshBooks, and what you can do to overcome them. [Self-employed? Here's what you need to know about taxes.]
1. No safety net
Small businesses tend to be less prepared for financial crises than larger companies. According to the survey, 48 percent of respondents said they are unprepared should the business get sued, and 39 percent are unprepared should they suffer a disability and cannot run their business.
"Without a safety net for small business, such as health care, unemployment compensation or emergency savings, many small business owners will limit their own potential as a way to mitigate risk," said Matthew Baker, vice president of strategic planning at FreshBooks. "This means many small business owners will forego attractive growth opportunities that require an upfront investment or a longer-term commitment, such as hiring a full-time employee."
Additionally, many self-employed individuals are not saving for retirement. A shocking 42 percent are doing absolutely nothing to ready themselves, even those who are nearing age 50. A similar amount of self-employed workers are also without life insurance.
2. Self-taught financial management
Being self-employed often means having no one to teach you the ropes. However, this doesn't bode well with finances. Almost half (46 percent) admit that their method of financial management should be improved.
Baker recommends adopting these financial habits:
- Regularly review finances
- Maintain a budget
- Save appropriate amount for taxes
- Proactively reduce debt
- Pay yourself a salary from business earnings
- Establish an optimal business structure for liability and taxes
- Maximize tax write-offs and deductions
Many small businesses are unable to find financial help through larger banks. In fact, 25 percent have been rejected as borrowers, and 52 percent feel that the banks do not serve the needs of small businesses.
"Large banks are simply not designed to lend money to most self-employed professionals," Baker said. "A credit officer at a bank is typically looking for collateral, steady income streams, cash reserves and other criteria often absent for self-employed professionals."
According to Baker, independent professionals can improve the chances of their loan application with a large bank being approved by demonstrating they've been in business over two years. Further, there are many other bank alternatives that are available.
3. Do-it-yourself approach
While DIYs are trendy and inspirational on Pinterest boards, this approach is not always suitable for businesses. Independent professionals are entering fields where they have no concrete experience, only learning as they go.
"Small businesses are remarkable for their ability to perform all the same functions as large businesses – just with fewer people," said Baker. "The catch is that small businesses are stretched incredibly thin and the 'do-it-yourself' approach is often good enough but not great."
The downsides, he stated, are lost efficiency and expertise. Inside knowledge on specific topics is a necessity when running your own business. Hiring a consultant or expert adviser for critical areas can help you fill in your knowledge gaps.
4. Selling themselves (and their products and services) short
Independent professionals have the mentality of "work today, sell tomorrow," which is putting them at risk of not selling their products or services much at all. In fact, 51 percent claim that they are too busy to sell, focused on other tasks throughout the day. Also, 37 percent dislike selling enough to put it off for quite some time.
"For small business owners, there is a healthy tension between winning new clients and delivering excellent results for existing clients," said Baker. "You can't afford to focus exclusively on one or the other without jeopardizing the future of your business."
Baker stated that small business owners should spend at least one day a week on new business activities like soliciting referrals, attending industry events or launching an email newsletter.
This study, sponsored by FreshBooks and led by Ellen Eastwood, was based on responses from 1,700 self-employed professionals and small business owners.