Should you ever borrow funds to grow your freelance business?5 min read
So you’ve decided to go out on your own and launch a freelance business. Nice work!
Now, it’s time to figure out your finances.
Generally speaking, you have three options: You could decide to fund your startup costs out of your own pocket (also known as bootstrapping); you could opt to sell equity to outside investors, giving them a slice of your profits in exchange for funds; or you could borrow funds by applying for a business loan, securing a business credit card, or taking advantage of a number of other small business financing tools.
Let’s explore the pros and cons of each option.
In an ideal world, we’d all be able to bootstrap our companies. We’d have more than enough money to get by, and we’d have the funds needed to rapidly scale our businesses when the time was right.
However, in an age where 40 percent of Americans can’t afford a surprise $400 expense, bootstrapping is out of the question for many entrepreneurs.
Even if you’ve got a strong and growing freelance business, bootstrapping may not be the best way to grow faster. Often, business owners who fund their companies this way tend to be more risk-averse. Because their own capital is on the line, this might make them hesitate to pursue new opportunities as they arise for fear that they might not get the returns they’re hoping for.
In fact, a recent study found—after three years—businesses using outside capital generated three to four times higher profits than bootstrapped companies.
2. Selling equity
If you find the right investors, you can finance your freelance business by selling equity. In these arrangements, you give your investors a percentage of your profits in exchange for a fixed amount of capital.
On the plus side, if you sell equity in your business, you don’t have to take on any debt and you don’t have to make a payment on a loan every month. You also gain access to insights from your investors who likely know a thing or two about business. In many cases, you may also be able to leverage their connections. In the event your business doesn’t grow as fast as you hoped it would, the investors are out of luck; depending on how you structure the investment, you might not owe them a thing. (If you’re curious, here’s a good place to start learning more about equity financing.)
Equity financing, however, is not without its downsides. First and foremost, since you’re selling an ownership stake in your company, you no longer can enjoy all of the fruits of your labor. If your company is pulling in $100,000 a year profit, a 10 percent equity stake might not pay out that much. But what happens if you get to $1 million a year—or even more?
Beyond that, you might not like having investors chirping in your ear all the time—no matter how smart they are. This is your business, after all. If your vision doesn’t align with that of your investors, bad things can happen.
All this assumes that you can find willing investors. The process of finding those investors might be too difficult, take too much work, or just be impractical given your business and situation.
3. Borrowing money
Instead of financing everything out of their own pocket or selling an ownership stake to investors, many freelancers decide to secure outside forms of financing—like a business credit card, a revolving line of credit, or a traditional bank loan.
Each different form of small business funding has its pros and cons. But, generally speaking, going this route gives you access to the funds you need to grow your business without having to sacrifice any of your long-term profits or give up any control of your operations to investors.
Of course, there are downsides to borrowing, too. You may have to take on a long-term liability and, depending on how much financing you secure, you might find yourself needing even more.
Still, for many freelancers, the pros of borrowing funds outweigh the cons.
In the past, when a small business owner needed money, they’d generally walk into the neighborhood bank and ask for a loan. More recently, however, traditional lenders have been hesitant to loan money to small businesses. In the second quarter of 2019, for example, only 32 percent of small businesses that applied for traditional bank loans were approved.
Sensing a market need, a number of alternative fintech lenders have emerged in recent years to fund small businesses. These lenders expedite the loan application and approval process, ensuring that freelancers can quickly secure the funds they need to grow their businesses. Not only does going this route increase the likelihood you get funding, but it also may take far less time.
This is a big deal because, as every freelancer knows, there are only so many hours in the day, and any time you spend on business operations is time that you can’t spend working for your clients.
The decision to open your own freelance business allows you to do what you love for a living, making your own schedule and enjoying the freedom that comes with being your own boss.
That said, there’s no sense in making your life as a freelancer any more difficult than it has to be. By doing your due diligence and researching financing options that are available to you, you get the peace of mind that comes with knowing the funds you need to grow your business are always within reach. With your financial challenges solved, you can focus on doing what you do best: working your hardest every day and delivering exceptional services to your clients.