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Access to Finance for Freelancers

The life of freelancers is characterised by many positive factors, such as freedom and flexibility, including the ability to determine when and where they work and what type of work they do. These factors are leading more Europeans to choose independent work, most of the times without the need of any upfront financial support, often needed for start-ups. Moreover, freelancers allow the enterprises which contract them to get flexible expertise that would otherwise not be economically feasible. Freelancers liberate enterprises from the limits of their internal resources and reduce the amount of finance required for innovation businesses to grow.


The problem with EU funding

Many EU funding schemes are inaccessible to freelancers. For example, the European Commission regularly publishes funding calls for various grant programmes like Horizon 2020 or Erasmus+, but only companies or non-profit groups may apply as partner in a consortium. The idea of a freelancer applying is not even considered.

Many of the existing EU financial instruments are designed to target companies or SMEs in general, whereas one-person businesses are excluded from the bidding process. Freelancers are highly skilled self-employed professionals without employees or employer; they are a unique subset of the micro-enterprise category of the European SME definition and differ from them in key ways, notably in their self-reliance. Their business model rests on supplying expertise to clients without necessarily seeking to scale up financially and take on permanent staff, which is typical of larger SMEs.

Public funded schemes need to consider the financial needs of freelancers, not least because with a 45% increase since 2004 they are the fastest growing segment of the European labour market. They should place an emphasis on metrics to track “work” taking place outside formal employment, instead of merely measuring “jobs” to gauge the strength of the economy. This will allow freelancers not to be excluded or disadvantaged in seeking funding and the value they create quantified.


How EU funding should improve

It’s imperative that freelancers are made eligible to apply for EU and national funding programs for SMEs by removing the obligation of being a “legal entity” with company number and add the option of a “legal person” for freelancers legally registered in European countries but without a company or staff (unincorporated). This is because setting up a company is no option for many freelancers as this would require in many European countries a large sum of money in the bank account and a taxation burden which many freelancers cannot afford.

Onerous bidding requirements should also be reduced for freelancers, for instance by lowering the amount of liability insurance and capitalisation requirements. This can be achieved by enabling consortia of freelancers to come together or form subcontracting arrangements to apply for EU funding (as recommended by a recent EUROFUND report). The new European Fund for Strategic Investments can be also used to lower capitalisation and provide long-term investments to cover the cash flow needs of the smallest businesses.


How private credit and micro grants could help freelancers

Most of the private credit schemes offered by the EU financial assistance program COSME focus on lending to address the financial needs of small businesses. However, loans and repayments may only exacerbate the challenges in the context of financial volatility and periodic income fluctuation that freelancers and micro-enterprises experience. EU financial assistance programs should instead focus on “financial resilience” and on improving small business’ access to non-lending financing routes.

Private financial institutions incur into fixed costs for deciding and processing loan applications, which makes lending small amounts (up to 25.000 euro) unattractive to them. The EU should develop financial assistance programs to make small loans more appealing to lenders (like enabling banks to bundle them) while reducing costs and bureaucratic obligations for private financial institutions lending to small businesses and freelancers. Moreover, small loans are sometimes not repaid and they can default up to 20% of the initial value, a cost which is taken on by private financial institutions. Hence, small loans need to be backed up by public guarantee schemes which in the long run are more cost effective than handing out non-repayable grants.

Micro grants should be developed up to 10.000 euro making the EU Progress Microfinance Facility accessible to all people (even outside vulnerable categories and low skilled workers) who want to start a micro-business or establish themselves as self-employed. This is particularly important in the professions where there is no need for large sums of capital to buy equipment to deliver a profitable service.

Municipalities can also introduce a refundable tax credit or provide tax exemptions in conjunction with a start-up subsidy for new micro-businesses in their first years of operation. This should be similar to the tax credits that local authorities often use to attract and retain large businesses.


The need for financial support matched with entrepreneurial education

Governments and the private sector should offer integrated packages (a mix of pre-start and post-start financial support) to maximise the complementarity of financial assistance with the development of entrepreneurship skills. This could take the form of mentoring and business coaching services, for example by helping to develop and implement a business plan, that can be provided in coworking spaces and be delivered in partnership with local actors e.g. chambers of commerce, the small business community, and microfinance institutions.

This not only improves the self-employed skills, but greatly increases their chance of getting mainstream funding in the future. There is evidence to suggest that actions delivered locally and customised financial education services for target groups have a positive impact on the sustainability of self-employment and on its potential to create jobs for others.


The need for more flexible banking products for freelancers

Banks across Europe are not currently catering for the needs of freelancers. The self-employed have always been seen as a riskier proposition for lenders as their businesses are less likely to be established. As a result, many freelancers are raising specific concerns about the lack of suitable banking services and this is an issue that needs to be tackled.

Governments should work with financial institutions to support the creation of more flexible saving products which freelancers can access, without penalty, when faced with income volatility. Banks should cap fees and make overdrafts repayable over a realistic period of time to account for fluctuating incomes. Governments should also work with the insurance industry to develop more affordable income protection insurance options for freelancers. This should include a specific focus on collective insurance models and cooperative models of savings.

Similarly, commercial banks should create saving schemes for their self-employed clients, as to allow them to channel a percentage of every invoice into a savings account and offer them more flexible terms on mortgage requests by delaying payment schedules.


The need for more flexible pension solutions for freelancers

It is fundamental that more is done to ensure freelancers are catered for when they retire. Many freelancers do not pay into a pension because of the volatility of income associated with being self-employed. If they do contribute into a pension fund and as everyone else, they are not allowed or are penalized if they want to withdraw money to cover periods of not earning.

Governments and commercial banks should create flexible pension solutions for freelancers, allowing them to withdraw the last two years of contributions without losing their interest rate so they can achieve financial security as their income fluctuates. This would encourage more freelancers to save for retirement, allowing them to access money if needed, and reduce the perceived risks of self-employment to new entrants.


Unleashing the potential of alternative finance schemes

European governments should promptly implement the provisions included in the EU Commission Crowdfunding Communication. This should be done to mainstream crowdfunding and other alternative financial matchmaking platforms that can connect the smallest businesses to a wide community of lenders, including peer-to-peer lending, micro-lending and SME angels.

European governments should also ensure the correct implementation of the Late Payment Directive, with specific attention to freelancers. A Prompt Payment Code may be considered where all signatories must commit to paying interests on late payment at a level above the Governments’ legal minimum as well as the introduction of a small business conciliation service with a ceiling for claims as low as 5.000 euro. To complement that, a fund could be established to pool the finances of small business owners, allowing them to dip into a collective pot of money as they await payments.

Invoice financing, which allows a small business to access money before the client has made payment, is yet another funding option around which more awareness should be generated and conditions improved. It is most frequently used to address short-term cashflow issues and problems arising from late payments. More banks should be encouraged to offer such options and lower the requirements to access them, such as minimum turnover thresholds and providing evidence like time sheets or proof of delivery of goods.


A freelancer’s pain in accessing finance

For the series: “Think Outside the Boss”, I have spoken to Matthias a 31 years old independent real estate agent from Germany. Here is what he told me:

The greatest thing about freelance working is how quickly and easily you can begin trading, with very little capital or business know-how. This has increased my chances of personal satisfaction and success defined on my own terms.
However, the biggest challenge to financial security as an independent professional is lack of constant income. There’s no paycheck on a regular basis so I’ve really had to learn how to save up for hard times and how to juggle paying for necessities. There are no training schemes in Germany that assist freelancers like me to learn how to manage my finances holistically and plan for income shocks during times of low business demand.
Between my mortgage, student loan, and some credit card debt, I feel that I have too much overhead from debt. This prevents me from consid­ering a business loan as I did not want to increase any more overhead.
Many small business owners in Germany had a chance to access the national microfinance scheme that was set up to disburse low interests loans up to 20.000 euro. However, the criteria for these loans privileged lower skilled unemployed, disadvantaged people or those at risk of social exclusion. As an independent professional in the real estate sector, I do not belong to these segments. My request was denied by the bank and I have no other chance to get a commercial credit.
I wish I could access some schemes to get my business off the ground that link pre-start financial support with post-start support i.e. to pair me with a business coach who can teach me how to manage and find clients, negotiate better fees, implement self-management and accompany me in realising my career as an independent professional.
Marco Torregrossa
Marco Torregrossa
#EFWeek Coordinator

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