7 hard questions you need to ask before going self-employed

Many of us dream of working for ourselves, but before you set up a business there are lots of things to consider. These include whether your business will earn enough, what you’ll do if you get sick and whether or not you want to incorporate or operate as a sole trader. 

There are plenty of costs involved with setting up a business and the admin can be complicated, so it’s not something you should do on a whim. 

If you’ve got a great idea and you think you can create a successful company – here are seven questions you should answer before getting started to make sure it ends up being a success.

1. Are you ready to be self-employed?

The first thing you need before taking the leap into self-employment is a business idea. It’s important to think carefully about whether there will be enough demand for whatever it is you’ll be selling.

Having an idea is the trigger point for you to start researching exactly how you can execute your business plan.

Making your business as efficient and streamlined as possible will allow you to focus on getting the job done, and hopefully making lots of money.

One of the main benefits of being a self-employed person is that you are your own boss. 

People often think that it means you can get up late, head off for a long game of golf in the afternoons and do anything you want. The reality is that setting up a successful company often means long hours and hard work. 

Of course, you can set your own start time, and even take afternoons off, but you need to consider what will happen to your business as you cut these valuable hours out of your working day. You might also have to fit around clients who might expect you to keep normal business hours.

Naturally, working a full week should mean you make more money, but becoming self-employed is also about working smarter as well as harder.

2. How much does it cost to become self-employed?

The financial costs of becoming self-employed and running your own business can vary significantly depending on what the company does and how it is set up. Some common costs associated with a new business include:

Renting a workspace

Some businesses can be run from home, but others require a separate workspace. Whether you’re running a clothing shop, selling milkshakes or making furniture, you will need premises that offer the space you need to operate the business efficiently.

Finding a commercial property can be difficult and expensive. Locations near city centres will charge higher rents compared to premises outside the city which are unlikely to attract much passing custom.

Before you decide to ditch your day job, get some quotes for suitable workspaces to see what the costs are likely to be. You can find out more about renting your own workspace by visiting the gov.uk website.

Equipment/Stock

If you require specialist equipment for your business, you'll need to factor in the cost of purchasing and repairs. If you can buy the equipment you need in phases it can make things more affordable, but you probably want to make sure you’ve got all the basics before you launch. The last thing you want to do is start your business without everything you need.

Knowing when to buy stock for your business is another conundrum. If you are selling clothes, for example, you will need to place your orders an entire season before you receive the items. This means that you will need to judge the demand you will have in six months’ time – before you’re even up and running. 

Banking

You will need to seek out specialist banking products to run your business. This is because corporate or business banking comes with privileges such as a personal business advisor at your chosen bank, and your income and outgoings being organised appropriately on your statements for tax purposes.

Business banking comes at a cost, so make sure to shop around for the best deal before choosing. Don’t just go with the same company that does your current account, and consider challenger banks such as Starling and Metro Bank as well as more traditional providers.

Insurance

Think too about the level of insurance you need as a self-employed person. Business liability insurance will cover you, your business and any staff you may take on for business-related accidents.

You might also want to consider income protection insurance or critical illness cover to make sure you have enough money to get by if you can’t work due to sickness or poor health.

Accountancy fees

Hiring an accountant to keep track of your finances will come at a cost but will enable you to focus on your new business.

If you want to reduce the costs, you could take a course on bookkeeping, do more of the admin yourself, and therefore cut how much you end up paying.

You can also decide to manage all the accountancy yourself, but it can be complicated, so it will be a drain on your time. You’re also less likely to know all the claims and rules, so you could miss out on tax advantages.

Whichever approach you think you'll choose, it's worth checking how much an accountant or the necessary training will cost before starting your new enterprise.

Hiring staff

Don't take on staff until you’re sure you have enough consistent demand to warrant it. Otherwise, you run the risk of paying out more on wages than you'll receive as an income from your business. 

As an employer, you will be responsible for paying the National Insurance for your staff as well as additional benefits, such as pension payments. Make sure you understand all the rules and be prepared for the extra responsibility before hiring anyone.

3. Should you use your savings to fund your business?

Using your savings to fund your business might be the cheapest option, but if you spend all of your rainy day fund you could face troubles later on. 

The pros and cons of using your own money to fund your business include:

4. What are the other options for funding your business?

If you don't have any savings to launch your new business or you want to keep them for emergencies, you'll need to find alternative ways to finance your enterprise.

Before you decide to go self-employed, you should create your own personalised business plan. You can use this to apply for the following:

Business current account: overdraft

Your business current account can offer you an overdraft that can be used as a safety net if you need a small sum of money urgently for your company. You can compare Business Current Accounts by using our comparison table.

Business credit card

You can use your business credit card for your day-to-day expenses and pay off the balance at the end of each working month. This is a good way to keep your business expenses separate from your banking transactions. You can compare Business Credit Cards with our comparison table.

Business loan

This will offer the lump sum investment you need to kick start your business. Typically, you can borrow up to £25,000 with repayments over up to ten years. Most providers offer a payment holiday at the start of the loan for six months, to give you time to focus on building your business before any repayments are due.

The acceptance of your business loan will be dependent on your business plan, so make sure you take your time when working out your budgeting analysis and financial forecast for the future. You can compare Business Loans by using our comparison table.

To find out more, read our guide on how to write a business plan for a loan step-by-step.

5. How will you pay tax on your earnings?

When you start making money as a self-employed person you will be expected to pay tax. 

The specific rules around how much tax you need to pay depend on whether you are a sole trader earning an income or if you have a limited company that pays dividends.

If you have an accountant, they should suggest the right balance of salary vs dividends to minimise your tax bill if your company is incorporated.

You’ll also be responsible for doing your tax returns, but if you have an accountant, they’ll usually complete this for you too. 

Failure to submit on time will result in late return penalties ranging from £100 up to £1,600 if your return is not submitted within 12 months of the deadline.

You can visit the HMRC website for further information on your tax obligations as a self-employed person.

You will also need to register and pay VAT if your turnover goes above £85,000.

6. If your business fails, will it have an effect on your personal finances?

If you seek personal funds after starting a full-time self-employed career you should be aware that lenders will want to know the details of how your company is doing.

This means when you’re borrowing for personal use, whether that’s a loan or mortgage, most lenders will require at least one year of audited accounts to judge your income. This is true for both sole traders and limited companies.

While it's important to remain optimistic and plan for success, you also need to be aware of the things that can go wrong for your business.

If you become overwhelmed with debt while self-employed, you will have the following options:

Liquidate your business – If you run a limited company you can liquidate your business. This won't affect your personal finances but will affect your seeking funds for business purposes in the future.

File for bankruptcy – You can only file for bankruptcy if you run your business as a sole trader. This could impact your personal finances and your ability to get credit.

7. If your personal finances suffer, will it affect your business?

If the worst was to happen and you fell into personal financial trouble, it's important to know how protected your business would be. 

Here are the various debt solutions and what they might mean for your company:

An individual voluntary arrangement (IVA)

An IVA is a legally binding agreement between you and any creditors that lets you pay off your debts at an affordable rate. 

Your name will be placed on the insolvency register which is available online and your credit rating will be affected, but you can still trade through your business. 

It might impact your business as companies may think it’s a risk to work with you, and you could find it more difficult to borrow money.

You can visit the IVA website to find out more.

A county court judgment (CCJ)

This is when someone takes you to court over an unpaid debt. Again, this will impact your personal credit rating.

If you have a CCJ there is no legal implication that will affect your status as a self-employed person or business owner. However, once again it means some companies don’t want to work with you and you may find it difficult to access credit.

 You can visit the gov.uk website for more information on CCJs.

Bankruptcy

If you file for bankruptcy then the courts will liquidate your company, dismiss any employees and sell off the businesses assets as part of recouping any money you owe. To find out more visit the gov.uk website.

If you are already in financial trouble when you decide to go self-employed you will need to seek financial advice to see where you stand in relation to setting up business-related accounts and how likely you are to be approved for any lending.

Is the grass always greener?

It's all too easy to get swept up with the idea of being your own boss, but before you make your final decision on whether being self-employed is the right thing for your circumstances, consider the following.

It's important to remember that serious planning is needed to make a success out of a new business. Working for yourself means that any failure equates to no income, unlike working for an employer where you would have a financial safety net.