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Investors should be aware of a long-emerging market that’s made up of a potentially lucrative asset class, but many of them don’t realize it yet. We’re talking about freelancers. Now that this market is emerging, investors need to explore, model and begin to collateralize these assets.
This is important because most (if not all) financing needs for freelancers are going unmet because investors and financial institutions are evaluating their loan needs like high-risk consumers, not as a business. This untapped potential means that the first innovative investors with the vision and creativity to meet this need could realize a highly dynamic and exciting market with the potential for high, sustainable returns.
Freelancers and solopreneurs are facing two significant impediments to being able to secure reliable growth capital. These roadblocks are primarily due to the outdated way financial institutions evaluate risk vs. reward.
The first misconception held by financial institutions is that freelancers are just the same as individual consumers — but they aren’t. They are a business with special characteristics. What makes them very different from traditional small businesses is that freelancers usually are the product.
However, since freelancers don’t have business projects beyond their own skills, banks don’t differentiate between them and regular consumers. This — coupled with the fact that freelancers (and most businesses) might not see volatility as an issue — means that, as freelancers build their businesses, the early days are often marked by swings in earnings on their investment.
In turn, traditional consumer loans on a traditional installment plan don’t make sense for freelancers. The result is a market in which gig workers have to self-finance, which hampers growth and success. Since banks don’t look at freelancers as small businesses, they tend to offer one-size-fits-all personal loans. This doesn’t make sense for a variety of reasons.
First, freelancers have all the functions that typical companies have: sales, finances and brand management. They just perform those functions themselves, rather than having in-house teams. Consumer loans with high interest rates (offered with little regard to cash flow, project pipelines or clientele) make little sense when we look at freelancers as businesses. Offering them the same loan you’d offer people trying to remodel their bathrooms simply doesn’t make sense, but the financial market hasn’t caught up with that stark difference.
A good example is the current student loan model: College students take out loans to earn a degree, but banks have no immediate return on that investment. Instead, they are betting on future earnings potential that may never occur, while students are left with thousands of dollars of debt that saddles them for years. In the same way that college graduates are forced to work in a model that doesn’t account for uncertain earnings potential, freelancers are forced to mold their business to loan terms that don’t work.
Offering a personal loan to freelancers has similar ramifications. A podcaster who wants to install a studio in her house might need a $20,000 loan for the project, but there’s no guarantee she’ll see a return on her investment immediately. Banks are hesitant to offer anything other than a personal loan without a solid, reliable income history. Her income from this venture will likely fluctuate, making it difficult to pay the loan off monthly. Even getting a personal loan might be difficult because she doesn’t have a W-2.
The venture capitalist route doesn’t work, either. Usually, freelancers aren’t looking to grow into multi-million dollar public businesses — the type that attracts venture capital investors seeking multi-billion dollar returns. Instead, freelancers can have much more modest ambitions for growth. Venture capitalists don’t invest for modest growth, so freelancers find it difficult to secure financing outside banks, as well.
A new way forward
It should be easy to customize financial offerings to each freelancer’s individual circumstances. For example, you’d think that if Amazon could customize each of its millions of customers’ shopping experiences, banks or investors could create a product that takes into account the unique problem set each freelancer faces.
A good approach would offer similar investment models for freelancers as those provided to small businesses or build new investment firms that focus on single-person ventures. Investors might seek a portion of a freelancer’s profits, thus allowing freelancers to grow their businesses without worrying about repaying a loan immediately. Since freelance business growth isn’t an overnight process, they can’t be expected to repay their loans overnight, either.
Break the mold and break into the gig economy
The first investors to embrace new models of evaluating freelance businesses can unlock the trapped value in this severely underserved asset class. Building financial products that encourage growth while taking into account freelancers’ unique challenges will lead to greater chances of success on both sides of the equation. Banks and investors have the opportunity to share in the profits of the growing gig economy, while freelancers get access to capital that works for them.
These changes won’t be easy. Tapping the gig economy’s potential for earnings will require a paradigm shift on the part of banks and investors, but the rewards could be huge. Investors and financial institutions are sitting on a customer whose needs haven’t been met, but the freelance economy isn’t going anywhere. A little creativity will go a long way to serve freelancers who want to grow.