Money advice for the self-employed

Dog walkerIf you’re self-employed, you’ve probably noticed that standard money advice often falls short.

A lot of what you read assumes you receive regular, predictable paychecks with taxes already withheld and benefits covered. Just try finding advice to deal with the following:

  • A major customer abruptly changes payment policies, so that five-figure check you’re counting on to pay the bills lands weeks later than you expected.
  • Your health insurer announces your premiums will increase 39%, and your insurance broker tells you that no other company will cover you for less…or at all.
  • Congress dithers on renewing a key tax break, so your CPA advises (at Christmastime) that you’ll need to cough up thousands more dollars to make yourself “penalty proof.”

These aren’t hypotheticals. Each has happened to me as a small business owner. Predicting income and expenses when you run your own show is often as much art as science. When you’re providing your own benefits, handling your own taxes and doing your own billing, your financial life becomes complex in a way that would confound most of the W-2 world.

This is what has helped me:

A business line of credit. Excellent credit scores helped me land a low-rate line of credit when I opened my business checking and savings accounts. I relied on it heavily when I was getting started to cover those inevitable gaps in cash flow (translation: slow-paying customers). I still use it occasionally to deal with unexpected expenses; I don’t carry a balance for a day longer than necessary, but I’d rather pay a few bucks in tax-deductible interest for a few days than keep a huge wad sitting idle in a business savings account.

A tax pro. I don’t write about taxes often, and almost never about business taxes. So why would I waste time trying to keep abreast of business tax law and struggling to do my own taxes when I can hire someone? Especially since that someone lives and breathes taxes, and can be counted on to represent me in an audit. We small business owners often have trouble delegating, but we’re far better off spending our time making money than wrestling with tax forms.

A simple rule of thumb. Early on, a CPA said he could bill me to make some elaborate projections, but he suggested a simpler way: save half. If I put aside half of every check that came in, I’d be able to cover my taxes and expenses. Ten years later I have a much better handle on cash flow, but it still pretty much boils down to saving half of what comes in.

If you’re an entrepreneur, I highly recommend “The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People with Not-So-Regular Jobs Paperback” by Joseph D’Agnese and Denise Kiernan, two freelancers who through trial-and-error figured out a money system that really works.

A credit line can help with cash flow gaps

Dear Liz: My husband and I are self-employed. As we pay our bills, we are often a few thousand dollars short as we wait to be paid by our clients. Until now, we’ve been using a home equity line of credit to bridge the gap. We are ultra-responsible about paying it back. But our current 10-year draw period ends this month, and our lender has denied us either a new HELOC or a refinance. Is there another product that would help us? It would be sad if the only way to maintain our life is to sell our house, but that might be where we are if we can’t find some small line of credit.

Answer: Talk to the bank that has your business checking and savings accounts about the possibility of opening a line of credit. This is a standard tool for businesses of all sizes, but can be particularly helpful for small-business owners who have cash flow challenges. The interest rates on business credit lines are typically low, and you may be offered higher limits over time as you use the account responsibly.

If your bank isn’t interested in helping you, ask other entrepreneurs to help you find a more business-friendly financial institution. A community bank may be more flexible and more interested in winning your business than bigger, name-brand banks, but the experiences of fellow small-business owners can guide you to the best options in your community.

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