How to minimise financial risk for your freelance business
The UK’s gig economy has never been stronger. A recent report found that there are currently two million freelancers working in the UK, with the number set to increase significantly in the coming months. It’s clear the typical 9-5 lifestyle is now a thing of the past with the current generation of self-starters wanting greater autonomy and flexibility over their working hours.
One downside of self-employment, however, is the uncertainty surrounding income. Earning one’s living from short-term contracts can be extremely stressful, especially in an increasingly saturated marketplace with tough competition for jobs. While freelancers new to the industry, whether it be creative or otherwise, can undercut more established workers to build their portfolio of clients, it’s critical that they establish a day rate that recognises their skills and experience and ensures they can earn enough to support themselves.
Another worrying development is self-employed professionals agreeing to undertake work, only to be later left out in the cold by businesses either refusing to pay or simply by declaring bankruptcy. Freelance writers and contributors, for example, have recently potentially lost thousands of pounds due to lifestyle magazines like The Pool going into administration. By working with unstable businesses, freelancers risk finding themselves with no guaranteed income on the horizon, thereby putting their entire livelihoods at risk.
How, then, can people who work for themselves minimise any financial risks to their business? Here are three ways in which you, as a freelancer can minimise financial risk for your freelance business, as told by Carys Hughes from Creditsafe.
1. Vet the credit history of new business ventures
Before undertaking a new project, every freelancer should investigate the credit history of their new client. Credit history and other business information is a key indicator of how reliable a potential employer might be, as it details how they have managed their financial responsibilities in the past.
There are various business intelligence providers who can provide information on almost any company registered in the United Kingdom. Important information to look at includes their history of late payments, any outstanding county court judgements (CCJ) for debt and even their predicted rate of company insolvency.
Another great resource is Companies House, which is a trading fund of Her Majesty's Government that provides publicly-available information on UK-based companies. By finding their potential client’s company number (usually found on their website), freelancers can search for the filing history of the business in question, which includes mortgage charge data, previous company names and insolvency information.
If freelancers find that potential business partners regularly fail to make payments or have faced bankruptcy in the past, they should consider focusing their efforts on other projects.
2. Deal with decision-makers
An easy way to gain greater reassurance over incoming payments is by establishing good working relationships with a potential client’s decision makers. Rather than dealing with interns etc., freelancers should find out who is in charge of budgets and outsourced work and make contact with them instead. Building rapport with people, even if it is centred around work, will help ensure that your work is paid for and that payment will arrive on time.
It’s also a good idea to speak with other freelancers who have previously worked with that business, as the best insight into the company culture of a potential client comes from the first-hand experience. If the feedback is positive, you should feel confident going forward that you will be paid for your services. However, if you discover a trend of irregular payments and frustrating follow-ups, it could raise questions about the opportunity.
3. Prioritise predictability
Freelance work is inherently erratic. A freelancer can spend one month working frantically to meet deadlines, while anxiously waiting for any project to come along the very next month. Monthly income can, therefore, vary greatly. Many who are self-employed struggle to track how much they have made and can expect to make in the future.
Nevertheless, it is very important for freelancers to get a clear picture of their income, outgoings and debts. As this can provide valuable insights into which business partnerships to prioritise in the future and which to avoid. On the surface, freelance income can seem very unpredictable, with multiple sources of income arriving at different times of the month. In reality, certain income streams are more predictable than others.
These streams should be a focus for your business, as predictability is a good indication that the business is sound and that the financial risk is minimal. Alternatively, if you notice that certain repeat clients are very irregular in both when they pay you and how much, perhaps future projects with them should not be a priority. Having a solid historical view of your freelance income will also allow you to prepare for busy and slow times of the year, helping you bring greater financial stability to a somewhat erratic industry.
Freelance work will always be an attractive career. The benefits of being your own boss, having the flexibility to work when and where you want and being able to choose projects that inspire you outweigh the uncertainty of being self-employed. However, many freelancers and contractors are weighed down by time spent invoicing, budgeting and chasing late payments. It is therefore crucial that freelancers and contractors properly vet new and existing clients to ensure that their bills can be paid on time and that their financial security is safe going forward. As the old adage goes, “failing to prepare is preparing to fail’, and those who are self-employed should bear this in mind to keep their business afloat in the long-term.
More on freelancer accounts and how to avoid late payments.