Financing a freelance career is difficult these days, if not downright impossible. The gig economy lends itself to freedom from a traditional job and the flexibility to work from anywhere, but it doesn’t lend itself to easily securing capital. This mutual exclusivity is the standard operating procedure now, but it doesn’t have to be the law of the land.
Why Financing Freelancers Is a Tough Sell
Freelancers are a unique group of workers (although estimates are that the number is steadily growing every year). Freelancers need financial providers who understand their work, the way they work, their networks, how they train themselves, and how they progress. Freelancers are their own micro-businesses – and they are the product. In this sense, a freelancer business mingles the needs of the individual and the needs of a business in one customer. This culmination of needs as a business and as an individual is where banks have struggled.
The gig economy is many things, but one thing in particular that gives financial institutions pause is the non-traditional income model many freelancers follow. Consider the freelancer who earns most of their annual income in the spring and summer months. The lack of flexible financing options means this person needs to plan ahead and save income to repay the loan over the winter and fall.
Freelancers have been left in a tricky space, trying to fit the square peg of their lifestyle and business into the circular hole of traditional banking products. That, in turn, raises their risk equation; their unique circumstances make it more difficult for them to repay a typical loan, which in turn puts them at a greater risk of default. Banks, therefore, might refuse to finance at all or may charge a higher interest rate.
A Win-Win for Everyone
With millions of Americans doing freelance work and millions more considering it, there are substantial benefits for changes to traditional financing options. In addition, digitalization has made it possible for financial institutions to provide more varied and customized products to their customers.
This really turns into a win-win for both freelancers and financial institutions. As it stands now, financing providers are at a greater risk of losing money because they’re not providing products that fit freelancer lifestyles. This applies to every aspect of their lives; besides a loan for their business, it’s also more difficult for freelancers to get a mortgage. The episodic, fluctuating income is too risky for banks to take on a traditional loan, so they charge higher rates for loaning money. But, of course, that’s if they end up providing a loan at all.
With customization becoming more and more possible, banks and financial lenders should explore new ways to offer custom products to freelancers. In addition, with the number of freelancers continuing to rise, the demand for such products will grow as well. However, this will require lenders to invest in learning how freelance businesses work.
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Lenders Have to Learn the Freelancing World
It’s incumbent upon financial institutions to learn what freelancers’ businesses are all about in order to provide them the best possible product. Once they understand the intricacies of how their lives and finances actually work, they can design financial products that are very well aligned with what freelancers do for a living and how they do it. This will then lead to happier customers who can actually find an affordable way to borrow money, as well as more pleased lenders who lower their risk and actually get paid.
Tying repayment schedules to freelance cash flow is a good start. Freelancers who earn most of their money during particular seasons have to base loan repayment around their cash flow; right now, they simply have to hoard away cash to make monthly payments during their slower months. A better system for loan repayment would consider monthly cash flow, reducing or even eliminating payments during months with low cash flow and tying the owed amount directly to revenue.
It’s Time for Freelancers to Get Access to Capital
It’s time for bankers to actually care about providing accessible capital to freelancers. Banks can create products that are friendly to the freelancers who file a 1099 rather than forcing them to fit the mold of W-2 workers. Let’s embrace the fact that freelancing is here to stay and is a potential goldmine for the lenders willing to adapt.