The economy fell 0.9% in the second quarter of 2022, marking the second straight quarter of decline. Traditionally, this is the official signal for a recession. As economic concerns grow, people may be looking at their employment options. For some, this may mean self-employment.
In fact, a shift towards self-employment seems to already be happening—Bloomberg reports that more Americans are working for themselves now than at any time since 2008. Of course, if you’re considering making this jump during a recession, you’ll want to be extra cautious and make sure you have a plan.
To help with that, we’ve put together this guide to help you make the move to freelancing or self-employment, especially during a recession. Ready? Let’s dive in.
Recent history has shown that recessions tend to produce jumps in the number of self-employed people. There are a number of reasons for this. Perhaps the most obvious is that people need jobs, and if they lose theirs, they may not have a choice.
However, there are also many good reasons to consider moving to self-employment even if you haven’t lost your job:
Many clients prefer to hire contractors. It is frequently more affordable for organizations to hire freelancers and independent contractors instead of a full-time employee. At the same time, a freelancer very often makes more than a full-time employee, because they can work with multiple clients or companies. It’s a win-win situation.
It’s a great way to diversify your income. Whether you’re working for yourself full-time or starting a side hustle while you retain your full-time employment, self-employment gives you the opportunity to spread your income across multiple sources, which provides a buffer in case one source folds under the recession.
Self-employment offers greater flexibility than full-time employment. Freelancers can generally do the work when, where, and how they want, as long as they meet their deadlines. This flexibility can be especially helpful in tough economic times—when daycares may be closed and childcare unavailable, for example.
Self-employment can help build a safety net. As mentioned above, freelancing can help you build more income streams to protect you in the event that your full-time job disappears. It can also help you earn extra income to build savings—this can go a long way towards helping you feel more secure during a recession.
Now, it’s time for the good stuff. These tips will help guide you through the process of starting a freelance business, whether that’s writing, design, photography, software development, consulting, or anything else.
First, let’s be clear about one thing: we highly recommend sticking with your day job and building your business on the side, at least at the beginning. While there’s a time and place for taking a leap of faith, the run-up to a recession is probably not that time.
Generally speaking, freelancing, consulting, and similar service-based solo businesses tend to have fairly low initial costs, making them ideal for tough economic times. That said, there are some costs that you’ll need to consider. At a minimum, you’ll need:
A working, reliable computer. If you’ve been relying on a work computer from your company, this could be a large expense. Graphic designers and photographers will want a high-end machine with strong graphics performance, while a writer can get away with something more modest. No matter which end of the spectrum you’re on, we recommend spending a little extra to get something you can depend on. Since a computer is so central to work these days, this isn’t the place to skimp.
Industry-specific software. In some cases, you’ll need to pay for professional software. Designers, for example, will almost certainly need pro-level software like Adobe Illustrator, while photographers will want Photoshop. Again, writers can generally save some money here—Google Docs is free and many clients will be using it themselves.
Business & accounting software. This includes things like accounting software for self-employed people, invoicing tools, customer relationship management (CRM) software, cloud storage, website hosting—the list goes on. These can add up quickly. Sometimes you can get away with a free solution, but in other cases, you’ll need to pay.
Miscellaneous expenses. There are a number of items you might find you need as you get started. Examples include business cards, a printer, or a comfortable desk and chair. It’s a good idea to have some money set aside for these sorts of things, so you can focus on the important stuff, like building your business.
With your startup costs covered, your next step will be to start laying the groundwork for your business, including:
How you’ll handle finances: Many freelancers simply use their personal bank accounts and dump all of their money in this one location. This is not recommended. It opens you up to confusion, particularly around tax time as you tally expenses. And, depending on how you structure your business, it may be legally necessary to separate your business and personal finances. Good small business banking can help a lot here.
The legal structure of your business: It’s entirely possible to structure your business as a sole proprietorship under your own name, which then doesn’t need to be registered. However, there may be reasons why you’d want to register as, say, an LLC. As a sole proprietor, you personally would be liable in the event of a lawsuit, whereas an LLC separates your business as its own entity, protecting your personal assets.
How you’ll operate: Consider how you’ll run your business on a day-to-day basis. How will you keep track of your work and finances? How many projects will you take on at once, and what will your process be?
It’s a good idea to work through these questions on some level before you start working for yourself. While you’ll almost certainly change your mind on some things and need to pivot, having a plan will help minimize the stress of the early days of self-employment.
Now the fun begins—it’s time to find your first client. There are a number of sources of potential customers for your new business: your network, freelance platforms and job boards, cold outreach, and good old-fashioned organic marketing.
Your network: You probably know quite a number of people who work at companies that use freelancers, and these are a very good source of initial customers, especially if you’re going to be freelancing in the industry you previously worked in. These people are already familiar with your work, so you don’t need to worry as much about having a portfolio or selling yourself.
Freelance job boards: Beyond your network, the next-easiest sources of potential clients are the various freelance job boards, platforms, and communities that have sprung up in recent years. There are tons. Platforms like Upwork can be useful, although they need to be approached with care—they can quickly become a race to the bottom, with freelancers competing on price. You also give up some of your freedom as a self-employed individual when you build your whole business on someone else’s platform.
Cold emails: This can also be effective, although it often feels discouraging. That’s because it’s essentially a numbers game—if you send enough emails or make enough phone calls, eventually, someone will bite. However, it can take a lot of emails before you get a positive response.
Inbound marketing: This includes your website, social media, blog, and other content. These are important—particularly the website—but generally will be the smallest source of clients. This may change as your audience and authority grow in your industry, but at the beginning of your business, this is not likely to be a major source of customers.
Congrats! You’ve got your first client. Now it’s time to turn these initial customers into momentum and future work. The way to do this is through testimonials and referrals:
Testimonials: When you wrap up your first project for a client, request a testimonial and referrals for additional work. These testimonials are an important source of social proof that will help you land future clients and negotiate better rates.
Referrals: These are almost universally the best source of work for freelancers, even those that have been in the game for years. The old adage that “word of mouth is the best form of advertising” frequently proves to be accurate.
A good practice to help secure ongoing work is to establish a rhythm for checking in with past clients to see if they need any work done (or can refer you to someone who does). This sounds like it might come off as pushy, but the reality is that people very often do need help. A quick reminder that you’re available can go a long way.
Keep this up for a bit and you’ll gradually develop a growing base of clients (and a steady stream of income). That brings us to the final point.
If you’ve been freelancing as a side hustle, your eventual goal is likely to take it full-time. This is a scary and daunting prospect, but also exciting.
The exact point when you can make this jump will be different for everyone. The two main considerations are time and money:
Time: Naturally, maintaining a full-time job while growing a business is a lot of work. The general rule of thumb is to grow your side hustle until it feels like you’re working two full-time jobs. This is unsustainable for most people in the long term, and so it’s the point when you may want to consider leaving your full-time job and going all-in on self-employment.
Money: The other main consideration is financial. If you were to leave your full-time job now, would the money from your business be able to sustain you? This is really a personal decision—some people are able to adjust their budgets to live on less, while others would need to be able to match their full-time income to feel comfortable.
At any rate, once you reach this point, it’s time to hand in your notice and embrace freelance life. Congratulations—you’re now officially self-employed!
Self-employment is one of the most rewarding—and most difficult—journeys you can embark on. This is doubly true during an economic downturn, when the risks are higher, but so are the potential rewards. These tips should help you build a recession-proof small business, so you can ride the waves and (hopefully) come out stronger on the other side.
On a long journey like this, you can use all the help you can get. That’s where Found comes in. Our small business banking and accounting tools can help you streamline your operations and run a more efficient, more profitable business.
This material has been prepared for informational purposes only.
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