Taxes & business banking for the self-employed


Credit where credit is due: can you avoid debt in freelancing?

Last updated on Aug 9, 2021

Kate Bailey

Freelance Editor

Nov 14, 2019

Building as you go and living off savings are commonplace for freelancers. And with so many benefits to nomadic freelance work, is it possible to avoid debt in freelancing and self employment? We have talked about avoid financial mistakes on our blog before but it is not always a mistake to have a line of credit to help through tricky spots or expand your business.

Before the digital revolution in banking and the growth of the self-employment and freelance market it could have been nearly impossible to start these businesses without a little debt in the beginning - even if it was to governments who were offsetting your start up costs. It was just a different version of the same game. Thankfully, we have a world of resources and companies literally dedicated to servicing the needs of freelancers and self-employed people.

The costs of accessing crucial services for freelancers has also declined due to greater demand and as small as it sounds, this change brings changes to your business eco-system and now, more than ever, it is possible to avoid debt in freelancing. Perhaps you have been considering it for expansion or to relieve stress, but is it the best option for you long term? Perhaps avoiding credit actually suits your business model? We will explore the nuances of these questions in discussing avoiding debt as a freelancer or self-employed person.

Firstly, it is of great benefit to remind ourselves that most freelancer scenarios come with a business registration and structure that means we are personally liable for our business in all sense. Financially, in regards to debt, it means ultimately that YOU have the debt, not the business. This could mean in times of hardship or in the closing of the business, carrying a debt from the business will still be a burden for you. This is not to put you off - but simply a reminder of this common freelance reality.

Heading: Not being paid on time 

We have previously written a guide to getting paid on time but that hardly means much. If freelancers had a dollar for every late payment they’ve received, they might just be able to pay back the amount of time they have spent trying to get late invoices paid. It is actually a travesty that freelancers go through this - that because there is more legal room than the obligations set forth by the government in regards to wages, insurance and social contributions - freelancers are at the bottom of the accounting pile.

When you work for larger companies, sometimes their invoice queues are up to six months long (really!) which is neither an excuse or acceptable - but it is a reality for freelancers. So in this situation, we could assume it would indeed be beneficial to have a line of credit. Often it is not just one client not paying on time but multiple (if not all, sadly) and your reality is you still have to prepay tax, contribute to your insurance, contribute to your social security, pay your external service providers and you know to live… rent, internet, phone bills, food, life administration and who knows… maybe a holiday or a chance to make some real savings accounts.

It could be handy indeed to have that line of credit. But, is it worth it to be indebted to offset the cost of people being indebted to you? For most small business - this is likely not the case. It is much better to pursue a watertight contract in regards to your payment and to ensure you have clear agreement from your client on this policy prior to beginning work.

It could be better to ask: if a client continues to pay late or not paying at all, are they worth having as a client? These questions depend on your individual circumstances and more often than not how long you have been in business, but it makes them nonetheless relevant. It is a question of sustainability. And this is only achievable in true and tangible senses. What can help you is integrated invoicing solutions. Back in the day, perhaps 4 years ago even, the rise of digital accounting was bringing the attention of business people, investors and the biggest companies in the world.

There were some light attempts at integrating a bank into the accounting system. That seems a little backward - what about integrating the invoicing service into the bank? Well, with a bank like Kontist it is possible. This also sharply drives new forms of integrated electronic payment of invoices - client to service provider. This can dramatically speed up the payment timeframes of bills and again - automates a large part of accounting that otherwise would take hours of manual tasking. Being able to sustain the business by having clients pay on time or having a good system to get them to pay on time is one way you can avoid going into debt as a self-employed or freelancer.

Building as you go - harder and longer, but keeps your business yours

Oftentimes, your entire freelance operation centres on you and you alone. Not just the work that you do but additionally the work that you have to do to run the business - tax, finances, accounting, lawyers - the list of needs is ever changing and ever present. This can often mean a slow building process - but that is not necessarily a bad thing.

You could be pushing your work and have many enquiries, and perhaps a line of credit would help you expand quicker to take this work on. But, could it be the case that having a monthly amount to pay for a bookkeeper would be cheaper and better in the long run for your business because then you could take on this work without taking on debt? This is just one example. It is a two-fold example. Not only would you not be in debt, but you would not be paying interest or fees.

These are the extras that will stay with you longer than the bill of the bookkeeper. These are expenses that you can claim through tax deductions, and you can not do this with a loan repayment. The cost of a decision like the one posed in this example? Patience, and accepting upfront costs. But, for those initial months of the new expense, perhaps you’ll find you do not notice it once the new work you have generated and had time to do starts paying. This is expressly an individual and context-based proposition, but could be worth variably applying to your growth strategy, or stress offset strategy, depending on how you look at it!

Budgets and savings - boring, but real

It can be said, plainly, budgets and savings are commonplace and commonsense. But, for many of the reasons above, it can be longer and harder for freelancers and self employed people to retain some sense of stability and this is most especially true in the first few years of business. The first budget you will do will likely make you laugh five years later. Savings can often dwindle quickly in the face of the unexpected and it can be very hard to build them back up again. That said, learning how to budget for your business and doing this on a frequent basis is a crucial foundation for the longevity and sustainability of your business.

Not only is it a snapshot of where you are, it is a chance to explore opportunities for growth or to provide clear figures that represent financial stability. And when you know that, you can make it a goal and you can make a plan to reach that goal. Many entrepreneurs will wax lyrical about seed funding and the benefits of debt, but few talk of the power of savings. Savings are a cold, hard, reliable safety net.

Sometimes the capacity to save means sacrificing your own wage or take home which can be a very tough and maybe even impossible decision for business and especially so when starting out. However, when there is a crisis or an opportunity for growth that may need capital of some kind, you will know you can do this and not owe anyone (or pay even more than you need to in the long run) to make it happen. Again, it entirely relies on your individual needs and the needs of your business - which, fluctuate dramatically in freelancer life - but the logic is there, even if it is not as cool as someone else paying for your business.

If you already have debt - that’s also totally fine. You can pay it down with laser focus, or just ensure you are meeting your obligations and sticking to your budgets. In 2019, it is absolutely possible to avoid debt when you are self-employed or freelancer - but it requires a multi-faceted strategy built on the foundations of freelance business we discussed above.

It can be all too tempting to remove the stress of finances and money from our life, but there is always a cost associated with this and it is not a monetary one. In some cases, credit is the only way to expand your business and that is a decision that requires some brutal financial planning and bookwork - but you may find the benefits are in your favour - and expansion is a great opportunity. It will all depend on your individual circumstances but ideally, at this point you are at peace with why one should be in debt and why it is a benefit, and if you yourself can avoid it.