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Self Employment Income Is Not Less Reliable Than Employment Income

Two people walk into a bank looking for a loan. One is the owner of a company and one is an employee. Why is it that the employee’s income is treated as more stable and secure than the owner’s? That makes no sense?!

It annoys me that self employment income is considered less reliable than employment income. That makes me a little banana-cakes. I know what people say “Well, when you have a job you know that money is coming in every other Friday. And when you are self-employed it doesn’t come in regularly.” That may be true, it also may not be true. But either way, it’s nothing some strict budgeting can’t handle.

It does take more work to manage self employment income than w-2 income, for sure, and maybe it gets bad rap. Not everyone is willing to put in that extra work. You have to put enough aside so you aren’t blindsided by taxes, you have to run your business finances in a specific way so you can keep track of all the business expenses, you must have enough in savings to get you through down times in your business, but so does the company you work for as an employee. You have to market your services so that you keep customers coming through the door. But at least when you are self-employed you have control over all those aspects.

When you are self-employed your income is more diversified. Let’s say you own a landscaping company and you have 20 clients. One of your clients doesn’t like your work and fires you. That’s too bad, but you still have 19 yards to landscape. If you work for a company and your boss doesn’t like your work, you are out on the street. As a w-2 employee one person holds all your cards. When you are self-employed you aren’t dependant on the thoughts and feelings of just one person. You always have more baskets with more eggs.

So this idea that because you are employed with a company that your pay is more stable than a self-employed person just doesn’t fly with me. A w-2 employee can still be fired for bad work. They can still be laid off because the company you work for was poorly run. The benefit of self employment income is that you have to upset a heck of a lot more people in order to be completely out of work and you have total control of how your company is run.

I’m not saying that owning your own business is good for everyone. I don’t think that at all. Some people are better off working for others and that is 100% a-ok. I’m just saying that I don’t believe that self employment income is less reliable over all than w-2 income.

What do you think?

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12 thoughts on “Self Employment Income Is Not Less Reliable Than Employment Income”

  1. Very interesting thoughts Ashley! I suppose it is because if a self-employed loses his business, it would take a lot of time and effort to start fresh.

    If a worker loses his job, it is relatively easy to find another one.

    The risk is more if a bank lends money to the self employed.

  2. This seems unfair to me as well, and I agree with a lot of the points you are making.

    I see what MoneyCone is saying, but I’m not sure I totally agree, especially in the current state our job market is in. I think there are a lot more variables. For example, a landscaper without a college degree has a lot less options for employment and income than does someone that holds a master’s. But it seems like the bank might not give consideration in that case anyway.

  3. I’m sure that the banks have done their homework and that there is a higher default rate that justifies calling a self-employed person as more risky. I don’t think they make any policy decisions along those lines unless there are numbers to back them up.

  4. You make some excellent points Ashley. There should be a way of measuring a business owners’ success, and relatively speaking, if they are successful, they should be viewed as a far less considerable risk to a bank loaning money. This is my first time on your blog. But I look forward to reading more.

  5. Maggie@SquarePennies

    You’d think they’d treat people as individuals with a history of income rather than just putting them into a catagory. I guess it’s cheaper for them to categorize since they don’t have to pay for the time it would take to evaluate on an individual basis. Couldn’t they just use your credit rating as a short cut for that? I’d think it would tell them everything they’d need to know.

  6. Great point about having more baskets with more eggs. Self employment income can come in sporadically but I’d rather have a diversified income source than just relying on a boss or one company. When my wife and I bought our house the loan underwriter made a comment about how many sources of income I had and how long it took him to go through everything. Its great being self employed but some days having a w2 income sounds better, during slow months or down seasons, but eventually things pick up and being self employed is great.

  7. Hunter @ Financially Consumed

    I think you present a powerful argument Ashley, and I have some lending experience that qualifies your point. I was a credit analyst for a long time, for a major automotive finance company. At one point I was working credit deals that car dealers would submit to us. Often, a sole proprietor or small business owner would want to finance a car. No matter the credit score, no matter how bad the financials looked, the approval decision was always made based on the payment history of the business owner. On paper they often looked terrible, but if they paid their car (often they needed the car to run their business) they got the money.

  8. Andrea @MoneyMastered

    My employer has shorted me money plenty of times – once they “missed” me somehow doing payroll and I didn’t get paid at all. While I would hope things like this don’t happen often, I’m sure they happen more than we would think. And even a stable income doesn’t guarantee that you’ll make your payments. Self-employed people are probably more conscientious about budgeting and saving because they have to be.

  9. Matt Wegner @ Financial Excellence

    Excellent post Ashley. It’s unfortunate that so many rules and pieces of the system are set up to discourage self employment.

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