While job loss can be a devastating moment, it’s also an opportunity for many people to chase an entrepreneurial dream. If you’re considering starting a business while collecting unemployment benefits, there are some things to consider before you begin. There may be unemployment requirements to keep in mind. And, for those who do take the leap in a down economy, sources of financing and consumer spending habits may be in flux. Having a solid plan that takes the economy into account is essential.
Can You Collect Unemployment and Start a Business?
You can start a business while collecting unemployment, but it may affect the amount of your weekly benefit and could be impacted by the time you need to spend searching for a full-time job.
When you’re collecting unemployment, there are typically work-search requirements where you must be performing regular job searches and be available to work immediately if a position is offered to you. This may eat into the time you spend on your business, or could require you to step away if a job is offered.
Rules vary from state to state, so you’ll want to review yours. But generally, nothing prohibits someone from starting a business while collecting unemployment, according to David L. Barron, a labor and employment lawyer at Cozen O’Connor.
“Use this time to do all the legwork, groundwork, and planning of starting a business,” Barron said in a phone interview. “None of that jeopardizes your unemployment, as long as you’re meeting your state’s requirements for looking for work.”
What will matter is income: Should your business begin earning money, you need to report that, and it may reduce your unemployment benefits. For example, in California, you can earn up to 25% of your weekly unemployment benefit. After that, your weekly unemployment benefit will be reduced by the remaining amount earned.
Job-search requirements can be time-consuming, depending on your state. So it’s important to take into account the time that you’ll need to spend job hunting and interviewing to satisfy your state’s reporting requirements. If you fail to meet them, you may risk losing your benefits.
Unemployment benefits typically also require you to be ready to return to work immediately, if a job is offered. While there are lawful reasons to turn a job down, not returning to work for a qualified position would likely result in the termination of your benefits, Barron said.
Self-Employment Assistance (SEA) Programs
A few states offer self-employment assistance (SEA), a program specifically designed to help people who are unemployed build their own business during that time:
States with SEA programs pay a self-employment benefit instead of regular unemployment insurance to help entrepreneurs as they establish their new businesses. The programs waive the work-search requirements to allow the participants to engage in full-time entrepreneurial activities.
States have specific requirements for training and counseling, which are designed to help educate new entrepreneurs. Check with your state to see what training and resources are available.
Pros and Cons of Starting a Business While on Unemployment
Time to consider other career options
Ability to test being your own boss
Opportunity to turn hobby into a profitable business
Unemployment benefits provide financial cushion
Any wages earned may decrease your unemployment benefits
Funding may be hard to secure
Learning how to start a business can be challenging
Unemployment can be a stressful time for many, but there are a variety of reasons it can be a great period to start a business. Losing your job allows you the time to consider other career options and to test out being your own boss.
While there are some industries that can be recession-proof or even grow during a recession, experts agree that starting with your own interests is key.
“If you ask 10 people from 10 different walks of life, you’ll get 10 different answers,” Toi Davis, program manager, small business programs at the University of Texas Extended Campus, told The Balance in an email interview. “Maybe it’s opening a restaurant because you love to cook, or you’re a retired teacher, so tutoring may be your thing. Whatever it is, be ready to learn and work hard for your dream.”
The cushion of unemployment benefits also offers a chance to test whether your hobbies or interests have the potential to turn into a financially sustainable business.
“If you have a hobby or something you do that you enjoy, you should continue to do it while you’re out of work,” Christopher J. O’Leary, senior economist with the Upjohn Institute, said in a phone interview. “The people who are most successful at transitioning to another career are those who have already had experience doing it, whether that’s playing in a band, painting signs, yard work, carpentry, or selling stuff on the internet.”
If you are choosing an area that will require funding, it’s important to know that it may be difficult to secure during a recession, too. According to the Small Business Administration (SBA), bank lending often declines for small businesses during financial crises.
New entrepreneurs should also be prepared for the additional challenge of long hours learning the ins and outs of running a business.
Strategies for Starting a Business While on Unemployment
During an economic downturn, being strategic with the type of business you start may be key. Specific businesses like auto repair, resume writing services, and tutoring often thrive. You can also make choices based on what will take your startup capital farthest.
For example, while opening and running a restaurant is expensive, a food truck requires far less startup capital. For professional services, working from home and hiring contractors and virtual assistants instead of full-time employees can cut down your costs, too.
There’s also the challenge of knowing when to forgo your unemployment benefits. According to Davis, the job search requirements may be a distraction to starting your business, so the decision to stop is a personal one. You’ll need to look at your state’s unemployment requirements and your own financial situation.
“This life-changing decision is made by the individual,” Davis said. “Everyone’s financial situation and reasons for wanting to start a business are different. Remember to educate yourself and use the resources available for new and existing small business owners.”
Other Small Business Startup Resources
There are many free resources available to individuals planning to start a small business. These websites offer resource guides and connections to local associations and mentors that can help:
- U.S. Small Business Administration
- National Federation of Independent Business
- U.S. Department of the Treasury Small Business Programs
- National Association for the Self-Employed
Local colleges and universities often have small business startup programs, too.