Setting up and working as a freelancer can be an exciting, exhilarating, and amazing experience. But it does have the odd downside. In fact, many different things can go wrong, from problems with finances through to legal disputes. And given the freelancer tends to work in an environment where margins are tight, it makes sense to cover your back from trouble at every opportunity.
So, we thought we would go through a few of the things that you need to watch out for, and that regularly catch out unprepared freelancers who are a little naive and new to the game. Read on to find out everything you need to know about protecting your freelance business.
The first step is to decide how to structure your freelance business. Most newcomers set up as a sole trader, and it’s a simple option – until you start earning a decent amount of money or end up in financial or legal trouble. At that point, it will be cheaper (in tax terms) to set up a limited company and pay yourself a small wage and pick up the rest in untaxed dividends. And as a sole trader you are entirely responsible for any other debt or liabilities, so if you are working in a risky environment, it’s best to avoid the sole trader route.
The next thing to watch out for is money. There are no guarantees that your will be earning next week, let alone in a few months time, as a freelancer, particularly when you are just getting started. Budgeting is essential, and there are many pitfalls you can fall into – self-employment can be a great experience, but the truth is that you are really out there on your own. There are no financial safety nets like holiday and sickness payments – of you don’t work, you don’t get paid. With this in mind, it is essential that you budget your money correctly. Allow for events like holidays and illness, so that when they happen, you won’t feel the hit.
While we are on the subject of money, it’s important to understand that it can sometimes be incredibly difficult to get clients to pay in a timely fashion as a freelancer. Seriously – it’s like getting blood out of stone in some cases. And the trouble for a freelancer is that when you rely on prompt payments and don’t get them, it puts you in an awkward position regarding cash flow. As you can see, this is another reason why budgeting is so vitally important for freelancers, as it will help you get through these tough periods. That said, good credit control can help – eventually. Sometimes you have to act tough to get your money, and in most cases, you will get it. But you also need to bear in mind that taking people to court for nonpayment is an expensive business, and it may not be worth the money, stress and time it takes to resolve.
You also need to budget for your taxes, as when tax return day comes around you could be let with a huge bill to pay, and HMRC on your doorstep demanding money. It’s best to put aside around 30 percent of your profits to make sure you have enough to pay your bills. You also need to keep accurate records, as there is a chance the tax office will want to see evidence of your income and expenditure Unless your accounts are perfect, there is a chance of an investigation, which is never a pleasant experience.
Insurance is vital for your freelance business as any issue could see you out of work and without any means of earning a living. Public liability insurance is critical, and you should also look at things like disability insurance in case you ever have an accident. Prices for insurance can vary wildly, so it’s something you should regularly be checking. If you were to change professional indemnity insurance provider, for example, there are often much better deals for new customers than there are for old ones. Some freelancers end up hiring people, and if this is the case for you, it’s important to take out Employer’s Liability cover – and you might want to consider insuring your equipment and office, too, particularly if you work with expensive gear.