I have a small business providing accounting consulting services which are based out of my home. Most days I LOVE it – it is consistently interesting and incredibly fulfilling. The thing that has surprised me the most is the difference between the perception and the reality of what it means to have your own home business. Here’s what I’ve learned:
Top 11 home business myths:
- You will not have enough work to make money from home
A lot of people are concerned that there will not be enough work for them to make money from home if they start their own home business. Before starting your business look into the regional market for your skills (or check online if you are hoping to work remotely). Depending on the local market for your skills and experience you may find that there is an abundance of work available.
MY TAKE: One thing that I found useful during my start-up phase was to work with placement agencies and other contractors to find work. Generally, you will make less money working with other contractors or employment agencies however you will make invaluable contacts and it will allow you to work consistently.
- You will not be able to afford to take self-employment vacations
It is a common misconception that owners of home-based businesses can not afford to take self-employment vacations. Contrary to popular belief, with proper planning and good fiscal planning self-employed individuals have a lot more flexibility in the timing and length of vacations that they can take. Employees generally have a limited amount of vacation available to them and get paid for a vacation in one of two ways. Hourly employees often receive their vacation pay as an additional percentage on every paycheck, whereas salaried employees are often paid their salary as usual during their time off. Similar to hourly employees, contractors should include vacation pay in their hourly rates or job bids. While market rates and competing bids will sometimes determine the profit you make, there is some flexibility in the rates you charge and there are many factors to consider when setting your rates (more on this below).
MY TAKE: My personal experience has been that successful self-employed individuals must choose between the money they would make during a period and their desire to have time off. I have prioritized having time away from full-time contracts periodically over the money I could earn during that time. It allows me to try out my ideas and fully recharge before starting a new project.
- You will not be able to get a mortgage or small business loan
It is a long-held belief that home-based business owners have a hard time getting mortgages or small business loans. This is not true. With small businesses and consulting firms on the rise, financial institutions have recognized the need to provide better services and compare mortgages and loans to self-employed individuals.
MY TAKE: I was an employee when I applied for my mortgage however I have experience working with self-employed clients and friends to successfully apply for mortgages. The first thing I have learned is that it is important to shop around. Some people will be able to leverage their relationship with their bank to get a great mortgage that they couldn’t get elsewhere but it is important to be sure that you are getting the best terms. Mortgage brokers are invaluable for shopping around as they can find out the terms a financial institution would offer you based on your specific circumstances. It is also very important that as an entrepreneur you can provide the bank with clear, organized business records that show consistent business activity for the past few years.
I have no personal experience obtaining a small business loan or grant. The best sources of information on this are the websites of the major financial institutions and government bodies.
- You will not be able to get small business health insurance
Many people are hesitant to start a home-based business for fear of living without small business health insurance. There are a lot of great benefits providers out there for people who are self-employed. Government and non-profit insurance providers are available for lower-income individuals and many other insurance providers have begun offering reasonable health insurance for all self-employed individuals. The key, as with everything, is to do your research.
MY TAKE: My experience seeking benefits for myself has been that there are many companies offering insurance for self-employed individuals but there are some special considerations. Some companies insist that coverage for less than 3-5 individuals will only be offered based on the results of a physical and they may exclude pre-existing conditions from the coverage they offer. It can also be difficult to get coverage in areas such as dental, optical and for specialists such as chiropractors.
- You will not be able to save for retirement with self-employment
Often people fear that they will not be able to save for retirement from self-employment without a company pension plan. Financial planning is the key to saving for retirement as an employee or a self-employed individual. Unfortunately, many companies are no longer offering pension plans for their employees and therefore the burden of retirement savings on the employed individual is much higher now. Ironically, this shift has meant that self-employed individuals may have an advantage over employees. Most self-employed individuals make their cash upfront and pay less in income tax installments and with-holding taxes. This provides them with the cash flow to invest more money in 401ks and RRSPs during the year than employees. Additionally, self-employed individuals often have the option of “soft retirement” by shifting to part-time work before retiring completely.
MY TAKE: Personally, my switch to self-employment has sparked me to be more cognizant of saving for my retirement. My pension savings more than doubled in my first year as a contractor and have continued to grow steadily since then.
- Your self-employment income will be too sporadic to cover your costs
It is common for employed people to fear the fluctuations in self-employment income that many people experience. With good budgeting and planning, most contractors can spread their income over the full year. In fact, as an employee, your income is fixed but as a self-employed individual, you can tailor your work schedule to earn more or less money as you need it. Many entrepreneurs find themselves filling downtime or earning “overtime” with smaller ventures such as project or interim work.
MY TAKE: Since I started the consulting company I have not had any downtime that I did not plan out as vacation, training, or transitional time. I enjoy having one to two weeks off between major projects to work on my projects and take some time away – therefore I plan for this with both my work schedule and my budgeting.
- Self-employment will look bad on your resume
Truthfully, there are still some places that would frown on some self-employment experience on your resume as they may see this as a sign that the person is not suited to be an employee. However, many companies recognize the value of having an employee who shows initiative and has a well-rounded variety of experience. Successful business owners demonstrate many skills that potential employers are looking for such as leadership; project management; accounting and budgeting; initiative and entrepreneurial spirit.
MY TAKE: In my experience recruiters for full-time jobs will often spread this myth to convince you to apply for jobs with their clients. Contracting recruiters will claim that the opposite is true. My experience with employers and human resource professionals has been that they recognize the value of hiring people with the diverse and well-rounded backgrounds that self-employment allows. The main questions that potential employers have are: why did you become self-employed? why do you want to return to being an employee? why now? why here? If you can answer these four questions satisfactorily then even the most skeptical employers will consider your application without reserve.
- You will make more money with small business earnings
Typically small business earnings are based on higher hourly rates than the effective hourly rate earned by employees and therefore people often assume that contractors make more money for the same amount of work. The truth is that the rates charged by self-employed individuals include a premium to compensate consultants for the added risk to the contractor; the convenience factor for the hirer; the costs normally covered by an employer (benefits, pension, some government remittances, vacation, statutory holidays, bonus, double-time, training, supplies, overhead, professional dues and medical or maternity leave); and the cost savings to the employer (administrative and human resource costs such as hiring, termination and severance costs). The larger monetary benefits of working as a contractor seldom come from higher hourly rates but come from lower taxes, more cash flow for pension spending, and the ability to control your income by working more or fewer hours.
MY TAKE: My earnings as a contract worker have been similar to the “all-in” salary and benefits%2B amount that I was paid as an employee (with the same growth as my employed contemporaries). The main non-monetary benefit to me has been the ability to work less or more depending on my desire and having more choice over whom I work with and what I work on. The main monetary benefit has been the tax savings I have experienced due to both the additional deductions as a contractor and the additional RRSP (401k) contributions I have been able to make due to the up-front cash I have received.
- You will be your boss
You probably want to start your own business to be your boss and truthfully there are many areas of work that contractors have more control over than employees however contractors are not entirely without oversight. As a contractor instead of having just one boss, you have many bosses. Every client you have is also your “boss” – they determine what you work on, when you work on it, how you work on it, and where you work on it. Further, when working on-site for clients it is necessary to comply with all their official rules and guidelines. The other aspect of being your boss is the responsibility that comes with it. As your boss, you are the one solely responsible for every aspect of your business from beginning to end. You must be comfortable pursuing new work, applying and interviewing for new projects, working at different places on different tasks, and taking care of customer billing and collections.
MY TAKE: As a contractor, I can often negotiate my hours, the location of my work, the type of work I do, the companies/people I will or will not work with, and the amount of money I get paid. Unfortunately, this does not always mean that in the short-term I never have to compromise for a client or project. Some projects dictate that you work long hours or work outside your region. The main difference is that I have the choice to reject the project or discontinue the work at any time without legal repercussions.
- You will set your hours and work less
Many people start their businesses to have control over how many hours they work but contractors aren’t guaranteed to work less than employees. It is true that once you have established your business you can pursue contracts and projects that allow for more flexible hours and less overtime. There is no guarantee, however, that you will always be able to find such projects. Further, as the one who is solely responsible for every aspect of your business, people often find that they are required to work additional hours to establish and maintain their business.
MY TAKE: I have chosen to take contracts with longer hours in past due to other considerations (experience, networking, higher rates, great location, etc…) however, for the most part, I have strived to find positions with flexible hours and little or no overtime. This has given me the freedom to pursue my projects and spend more time with my family. This has required a lot of planning and budgeting and has generally led to lower annual incomes than I might otherwise earn however the improvement in my quality of life has made this more than worth it.
and the biggest myth of home-based businesses…
- You will always be able to work at home
The words “home-based business” bring to mind images of working at home while wearing your pajamas. Home-based businesses often require travel and/or visitation of external offices. Sales and service jobs typically require meetings with clients. Even remote IT personnel often need to visit their head office periodically. The flip side of this is that the majority of the time, home-based businesses can be run from anywhere – with only a phone and laptop.
MY TAKE: I have taken on contracts that require me to work off-site every day, four days a week, or once a week. I have also done completely remote work but I find this to be the exception rather than the rule for my field (chartered accountant). As mentioned above though I have also enjoyed being able to work at home, at the cottage, at campgrounds, at family members’ houses, and many other beautiful places. There is a lot more freedom as to where you work when you have a home-based business – but you should not rely on the idea that you can run things without ever leaving your home.
Overall, the best way to know what you are getting into is to do some research. If possible talk to someone in your field who has an established business, talk to local recruiters and businesses about the availability of work, look for contract or project listings online. It is also a good idea to sit down and calculate the amount of money you need to earn every month to maintain your desired lifestyle – this will provide you with a benchmark to compare expected earnings to. Whether you decide to leap or not it pays to be informed.