Lenders need to understand that self-employment is the new job

The Small Business Administration should devote more resources to one-person businesses, which currently struggle to find the kind of financial and other services that all businesses need, write Sima Gandhi and Chris Pilkerton.

Julia Amaral/(JLco) Julia Amaral – stock.adob

It’s never been easier for people to work for themselves. The internet, digital tools and growing convenience with e-commerce mean businesses just need a “.com” “linktree” or “@” instead of expensive storefronts. Customers are no longer restricted to foot traffic on the main street – every online user is now a potential customer. Video technology and social media are recreating in-store experiences and facilitating services at a fraction of retail overhead, lowering barriers to entry. Unsurprisingly, self-employment is a driver of entrepreneurship and workforce growth in the United States

By 2027, 90 million Americans will work for themselves one way or another. While these independent contractors make significant contributions to local communities and to the state and federal tax base, they face headwinds from financial and regulatory systems designed for big business. Business registrations, tax and accounting requirements, compliance, and legal overhead don’t often differentiate between a sole proprietorship and a larger business. However, a company’s businesses often don’t have the same kind of financial resources and dedicated teams that can help them comply and navigate the maze of requirements. Small business – and increasingly sole proprietorship – is the engine of the American economy. And it’s time for our decision makers to combine private sector solutions to support this growing sector.

One of the first challenges for these self-employed workers is business banking. Often, traditional financial institutions do not recognize them as businesses, but rather as individual consumers. This reduces the types of services and tools available to them. And the simplicity of some payment apps leads to accounting messes, unexpected processing fees, and confusion around the FDIC eligibility. Fintechs and other startups are taking steps to provide that support with one-stop business banking platforms that set them up with the tools to automate accounting, 1099 flows, and other key business processes that solopreneurs often struggle to understand. These platforms often provide them with their first business bank account, allowing them to avoid the accounting and tax mess that comes with mixing personal and business funds. Community Development Financial Institutions (CDFIs) can also play a role here by advancing digital lending opportunities and supporting these unique entrepreneurs.

While financial services technology is critical, government can also take steps to improve opportunities. Generally speaking, the US Small Business Administration defines small businesses as those with less than 500 employees. While this analysis has served as the basis for many impactful programs, policymakers should consider the effects of defining a class of solopreneurs who could benefit from a streamlined regulatory environment and a dedicated source of training to support regulatory compliance. A system that allows more people to work for and support themselves by reducing regulatory and legal barriers to entry is a system we should all be able to support.

Such a strategy could also consider state and federal partnerships that would minimize multiple registrations and set certain limits on the taxable income of permitted secondary agitations. Additionally, updated IRS guidelines that take into account the messy reality of mixed business and personal spending could help reduce the stress and guesswork faced by many solopreneurs. Digital tools and social platforms have expanded opportunities for customer engagement, but bureaucratic hurdles have not kept pace. And this challenge will only grow as not only have Gen Z actively sought out this opportunity, but older generations are reinventing themselves as part of this booming market. Terms like ‘quality of life’ and ‘social impact’ make more sense now because they are more accessible than ever.

As we enter a presidential election season, the candidates have already begun to present their overall political plans for 2025. This growing population of solopreneurs deserves consideration and clarity on how these issues will be considered and addressed so that more people can get started more easily. and cultivate their own piece of the American Dream.