-- intro: There’s a reason why so many people stay happily ensconced in their desk jobs and don’t venture out to start the businesses they’re dreaming about or the freelance careers they’ve contemplated. Venturing out on your own can be scary and filled with uncertainty.
Whether you’ve been planning the transition for years or suddenly pulled the trigger, one thing is certain: You’ll encounter challenges that you weren’t anticipating.
Recently, my boyfriend Gio and I started a business together importing and selling fitness and beauty products on Amazon. Both of my grandfathers were entrepreneurs, so you might think that somewhere along the line I would have picked up some of the basic principles of starting and running your own business. Unfortunately, I find myself bumbling through the process like most other first-time business owners.
Here are a few things that might surprise you.
quicklist:title: Cash Flow Problemstext:
It turns out it takes time to get paid. Whether you’re a freelancer waiting weeks or months for payment on your invoice or a business owner dealing with companies that pay invoices every 30, 60 or even 90 days, there’s likely going to be a significant lag between when you do the work or sell your product or services and when you can expect to receive cold hard cash in return.
That can present a problem since you still need to pay your own bills on time. Your landlord or your product manufacturer probably won’t be sympathetic about the fact that you’re waiting for payment.
If you’re starting a company, try to have a float of working capital to help you get by as you’re waiting to get paid. If you’re a freelancer, working capital is also important since far too many freelancers bridge the time between payments by relying on credit cards and having to pay the interest fees when a client pays late. If you don’t have enough capital to help you get through these gaps between payments, consider getting a line of credit which will charge you significantly less interest than a credit card. Also, be sure to structure longer contracts with a number of different milestones and smaller payments rather than with just one payment at the end.
More From Credit.com: How to Shop for the Best Personal Loan
quicklist:title: Problems Getting Credittext:
People who work for themselves face difficulties accessing credit for a number of reasons. If you don’t have a long history of self-employed income, you're likely to have a harder time qualifying for credit cards, lines of credit and mortgages.
Another problem that entrepreneurs face is if lenders won't provide a line of credit to the company without someone with a regular income stream co-signing it. If you don't qualify because you don't have income, it makes it hard to get any sort of credit.
There are a few ways to get around this, including applying for a personal line of credit or credit increase before you quit your day job. Another strategy is to spend some time building up your freelancing career or business before quitting so that you can show proof of income. Also be sure to work on building or maintaining your good credit, which is also typically a big factor in getting approved.
More From Credit.com: How to Build Credit the Smart Way
Luckily, for our business we only need one person working on it full time. That means that I’ve kept my job and my ability to access credit. In fact, we just applied for our first business credit card the other day. My income was a major factor for why our bank was willing to consider our application.
quicklist:title: Success Always Takes Longer Than You Expecttext:
Another thing that people starting to work for themselves don’t often consider is how long it takes to be successful. From startup costs to learning curves, you’ll likely face a number of obstacles before you’re successful.
In fact, I would suggest you be overly pessimistic in your financial projections. This can be helpful as you build up your financial reserves before making the leap to start working for yourself. You might also consider keeping your job until you get enough traction and generate enough income to justify quitting.
No matter how much you’ve spent modelling the growth of your business, there will inevitably be delays and setbacks. For example, Gio and I were excited when we received an email from our manufacturer with our first product packaged and ready to ship. Our joy soon turned to horror when we realized that they had packaged the wrong product. It took another two weeks for them to fix it and ship the right product. In business, time is money.
Freelancers also encounter these kinds of delays. Finding clients and getting them to formalize their contracts and start work will always take longer than you expect. By being prepared, you can plan better.
More From Credit.com: How to Get a Personal Loan With Bad Credit
quicklist:title: Unexpected Coststext:
Another thing you might not expect or plan for is the significant increase in health care or other costs that your employer was previously paying. While you probably anticipate that there will be health care costs, most people don’t appreciate how expensive insurance and co-pays are. If you’re starting a business with a spouse or partner, it might make sense for one of you to keep working and the other to devote his or her time to the business. That way, you’ll still be able to get benefits.
Other potentially unanticipated costs are the costs of registering and incorporating your business, accountant fees and bookkeeping expenses. Sure, you might think you can handle all the administrative work yourself but you might soon find it overwhelming and decide to outsource it like we did. It’s better to build these costs into your budget since you’ll be able to build these costs into your prices or hourly rates to ensure that they’re covered. You also shouldn’t forget about planning for retirement. You need to replace the 401(k) that your employer used to provide so that you’ll have enough to retire.
quicklist:title: When to Give Uptext:
Finally, the last thing that people don’t anticipate when they’re starting to work for themselves is the moment when they might have to decide to cut their losses and start looking for a job. We don’t want to think about our businesses or freelancing careers failing at the moment when we’re trying to get them started, but it’s important that we do.
There is something called the Sunk Cost Fallacy that makes us less likely to give up on something when we’re more physically, emotionally and financially invested in it. As we put more and more time and energy into our freelancing careers or businesses, we begin to fear losing that investment and be more willing to invest too much and be less likely to walk away even when that’s the smart thing to do.
That’s why it’s important to decide ahead of time what would make you return to traditional employment. Some people give themselves a certain period of time, or a certain amount of money to invest. Others decide that if they can’t meet an income threshold by a certain date then they will give up their dream. By setting up a framework from which to make these decisions, you’ll be more likely to make a decision that’s in your best interest.
Gio and I have a limit on how much we’re willing to invest in the business and we know that if we run out of money or lose our original investment, then we’re going to call it quits. Knowing this going in gives us clarity and will stop us from throwing good money after bad, as the saying goes.
Whether you’re starting an online business like Gio and I or becoming a freelance business consultant, it’s important that you’re prepared for whatever challenges comes your way. I hope that these tips and cautions will help you create a more successful business or freelancing career.
Any opinions expressed in this column are solely those of the author.