How to go about starting a trade business
There are several steps to running a successful trade business:
- The most important is the ability to do the job well. This underpins everything else
- Then you have to launch out and take the initial plunge
- Once you are up and running, there are a number of things that keep you going (e.g. record keeping, simple marketing etc.)
- The final piece of the puzzle is harder than it sounds, but if you follow our advice you will be OK. It’s pricing things right
Do you do the job well?
One of the attractions of the trade is that, with 70% of work coming from recommendations or existing relationships, doing the job well is usually enough to be successful. You don’t need to know much about sales and marketing or lots of other stuff for your business to be a hit.
Of course, where your particular trade has legal requirements, like Gas Safe qualifications or Electrical Part P expertise, you must already have these before you go it alone. That’s the starter for ten.
But the question you also have to ask yourself before launching out is, can you do the job well?
The clue to this is the amount of experience that you have and the sort of feedback that you have been getting from your customers and your boss. That’s both the positive and the negative.
It’s not a good idea to launch out on your own if you frequently get told you did a poor job. Life will be even more miserable as your own boss. You will end up clashing with customers, not being paid, struggling to find work and in the worst case, being sued. Sorry, but that’s the truth.
Motivation
Before you start up, it’s important to understand your own mind. What are you trying to achieve? If it’s purely an easy life, you probably won’t make it work.
The fact is that while there are many benefits, there is more pressure when you run your own business. You have to satisfy your customers, you have to make enough money, you need to find work. HMRC (Her Majesty’s Revenue and Customs aka The Tax Man) needs to be fed. People will try to scam you. Some people can’t cope with all of that.
You also need to understand whether you want a better lifestyle or whether you want to build a larger business. This article is about being a sole trader. It’s very different if you are looking to be a larger, more successful business. However, the good news is you can always adopt a more ambitious approach at any time. Starting out as a sole trader can be a good stepping-stone.
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Satisfying customers
It’s critical that you satisfy your customers but there are two sides to doing this.
The first is doing a good job – their problem needs to be solved, the new item installed or some maintenance done. Then it all needs to still be working six months later! You would think that would be enough, but it isn’t.
The second part is hard to understand, but still true. You must meet your customer’s expectations. Unfortunately, if you do a good job but fail to meet expectations you can still leave a dissatisfied customer. This can be very frustrating.
That’s why it’s important to understand expectations.
There are three things that customers will typically have expectations about:
- The cost
- The timescale
- Quality and what’s included
In each case you need to deliver, or come very close to delivering, what your customer expects. The key to this is for you to set your customer’s expectations ahead of time based on what is realistically possible.
It’s hard to set expectations correctly, but you should try to learn how to do this by practising hinting with customer what to expect e.g. “Painting that wall while not fixing the damp problem will make it look better but not for long”. You will find that being over-optimistic is your biggest enemy.
The easiest way to get started
By far, far the easiest way to get started as a sole trader is to begin by doing some work on the side but avoiding putting your main employment at risk. It’s important to note that this only works where jobs take hours or a day or two. It’s hard to pull this off if you’re building an extension or remodelling a garden.
Doing work for family and friends helps you to build up experience and cash. It helps you to buy the tools you need to fully strike out on your own. It should also establish a reputation. You can then start building up a network of people to recommend you that drives the businesses of most sole traders.
Charging a lowish hourly rate for this early work avoids the risks around agreeing to a fixed price before you have much experience. It also means that you can assure your customers they are getting a bargain.
You MUST keep a copy of EVERY invoice for materials, tools and other costs. This will enable you to make claims for these against any tax liability. These invoices are almost as good as money.
Just remember that all work will be taxable so you should set something aside for that.
Continued below
Types of Business
Going solo
If you have built up a small business on the side, the jump to going solo is much easier. And then you already have experience of working on your own.
If you haven’t already started it’s a bit more tricky as you need money for tools and to find customers on day one. There are two ways of getting some money to get started, a loan from family or friends or a loan from the bank. The problem with getting a loan from the bank is you will need a business plan. You may need some help with putting that together from a local accountant. However, the bank may also be able to help with some free advice.
Sole trader
You have a choice of two ways of running a business with just yourself. You can be a sole trader or you can form a limited liability company. The majority of people working on their own become sole traders as this is a bit better from a tax point of view and is also simpler.
You have to register with HMRC as self-employed, you can find the details at www.gov.uk/set-up-sole-trader.
You must file a tax self-assessment every year. You will pay both income tax and national insurance (NI) contributions.
Limited liability company
A company costs a bit to form but shields you from liability. A company has an existence before the law in its own right. That’s why, if things go horribly wrong, creditors can’t come after your house, car, bank account and other possessions. They can only take the company’s possessions.
The customer’s contract is with the company, not you, even if you are the only employee and sole director. It does mean you have to file annual accounts, an annual confirmation statement saying who owns the business (usually just you) and an annual corporation tax return. On top of that you must file pay-as-you-earn (PAYE) tax returns if you want to run the company in the most tax efficient way.
You would probably need to have an accountant help you with all of this.
Additional useful information: How to start a trade business post-lockdown
Insurance, Accounting and Tax
Insurance
Public liability insurance is not required by law, but if members of the public could be hurt in any way by something your business does it makes sense to have cover, particularly as it’s quite cheap. Public liability insurance should be less than £5 per month for one million pounds of cover.
Professional indemnity insurance is not required by law either. However, if you are a sole trader you will be personally liable for mistakes. That means that if, for instance, you caused a flood or a fire you could be sued for the cost of the damage. You could lose any money in your bank, your car or your house. This may be unlikely, but for less than £10 per month, you can buy one hundred thousand pounds of cover.
Once you take on your first employee, even on a temporary basis, you are required by law to take out employers' liability insurance. Again, this is pretty cheap.
Depending on your customers, you may find that you have to have public liability and professional indemnity insurance before they will let you work for them. This is less likely with residential customers but much more likely with local government and business customers.
You can quickly find insurance providers by searching online for “sole trader business insurance”. Hiscox.co.uk is one of the biggest and tends to have competitive prices.
Other insurance that you might want to consider is insurance against theft of your tools and income protection insurance. The latter, however, is likely to be quite expensive and difficult to obtain until you have a track record.
Accounting
It is absolutely essential to keep full records of your business. That means copies of all of your sales invoices and all the costs you will claim for running your business. Costs include materials, tools, costs of running the van, overalls, insurance and more.
Dealing with the accounts is the most complex subject so we won’t try to cover it in full here. There is a decision to be made on whether you will do your own accounts, in which case you will need to learn the various rules or whether you will use an accountant. It’s probably best to use an accountant, as the time saved will probably enable you to earn more than the cost of the accountant.
A relative of mine had an inspection from HMRC. They decided that he was understating his sales. They then assessed an additional £4,000 in tax which he had to pay. Yes, he could have fought this, but the time and cost with the likelihood of still losing meant he decided to just pay up. Having good records and submitting believable returns generally protects you from this sort of thing.
Avoid the problems by playing by the rules right from the start. Get another trades person to recommend an accountant and save yourself both time and money.
Read more: How to write an invoice
Pay (or save) as you earn versus Self Assessment
When you are paid by a business, or if you pay yourself from a limited liability company, by law you must operate pay-as-you-earn (PAYE). In other words, the employer pays tax to HMRC each time you are paid.
In contrast, if you are self-employed, you pay tax at the end of the tax year. So, it is very important to set aside money for that tax. It is a very bad idea to ignore this. You are likely to end up being fined and also having to pay interest.
A good rule of thumb is to set aside 20% of your earnings for tax as you go along. Some people open a separate account to keep this money aside.
Get advice
There are lots of Facebook groups and internet forums where other sole traders discuss their businesses and there are many people that will help with advice. It’s a really good idea to get involved in these groups, as they can be a great help when you hit roadblocks.
Any other local trades people that you know will also be a great source of wisdom. It’s really important not to start with an attitude of knowing it all. We all have things to learn from other people and it will help to improve our business.
Costs
As was stated before, getting going by doing some work on the side is the easiest way to start. But either way, the following are the costs that you need to think about when you go full time:
- Tools
- Van – purchase or lease, fuel, servicing, insurance and tax
- Business insurance
- Materials
- Accountant fees
- Work-in-progress – this recognises the fact that if you work on a job for a month and then send an invoice to the customer, you will then need to wait until they pay you. In the meantime, you have to both shell out for materials and cover your living expenses. The bigger the job, the worse the problem
You may be able to get your customer to pay up-front for any major supplies needed for the job and this will certainly help your cash flow. However, there are likely to be some materials which you just need to have in store. This depends on your business, but might include fixings, wire, pipe, wood, screws, nails, undercoat and similar.
It’s best to try to keep your initial costs as low as possible. Spending money is fine when you’ve earned it while running up debt can simply put you more under pressure. So, managing with the family estate car or a cheap second-hand van may be the order of the day until your business has really got going.
If you are going to splash out, it may be that the place to do this is with tools. After all, these have a more direct bearing on your ability to do a quick, quality job. Again, great brands like Dewalt can often be found second hand.
The good news is also that you should be able to resell second-hand equipment without too much of a loss if that becomes necessary.
Continued below
Finding your first jobs and how to cost them!
Finding your first jobs
As you launch your new business, there is no better place to find business than your family and friends. All households need to get work done by tradesmen and your family and friends are no exception. Doing a great job for them will quickly lead to more work. People share good experiences and when they want some work doing, they ask their friends. Word of mouth is the invisible sauce that drives the business of all sole traders. That’s why doing a great job is so important.
Easy and low-cost ideas that can help you build on top of that are putting your business name and contact details on the side of your van and wearing a t-shirt with your business name and contact details. Another idea is handing out business cards to every customer and prospect. This helps to keep you in mind. You can order cards very cheaply across the Internet.
Other routes for new business are marketing organisations like Checkatrade, Trustatrader, Rated People and My Builder. These work for some trades people but have the problem that you don’t get work until you have good reviews. But you can’t get reviews until you win work through their platform. All of them charge in a variety of different ways for helping you to get the leads.
Get your pricing right!
The main reason why people give up their own business is because they don’t have enough money coming in to survive. The reason is often pricing.
There are two ways you can charge customers. One is by quoting a fixed cost for the job. The second is by charging by the hour.
Both can be fraught with peril. The reason is that if you consistently undercharge you may win a lot of business but will find that you can’t afford to live. If you consistently overcharge you won’t win much business and the same will happen. So, getting those quotes right is vital.
Quoting a fixed amount for jobs has big problems if you cannot estimate accurately. Estimating badly can come about from:
- Lack of experience
- Being too optimistic
- Just not having the ability to do this
The last of these points can’t really be addressed. We all have various talents and sometimes our brains just don’t work the right way to do certain things. The other two can be overcome, but it takes time and discipline. So, although estimating jobs and producing fixed price quotes is usually necessary for larger jobs and has the potential to allow much higher earnings, it also comes with a lot of dangers for the new sole trader.
The second way is to charge an hourly or daily rate. This is much safer but it’s important to get that rate right. Below I’ve outlined a way to do this. It’s not that difficult but it has a number of steps. If you really don’t get on with figures just get a friend to help. It won’t take much.
You need to answer a simple series of questions:
- What hours will you work each day, giving a number of hours per week?
- How much of these hours will you typically spend for lunch during the week?
- How much of these hours will you typically spend travelling to the jobs?
- How much time of these hours will you typically spend buying materials?
- How much time of these hours will you typically spend meeting clients to discuss jobs (unpaid)?
- How much time of these hours will you typically spend (unpaid) doing paperwork?
When you’ve answered these you should have a total number of hours per week, say 8am to 4.30pm every day – 8.5 x 5 = 42.5 hours. After allowing for a short lunch break, travelling, buying materials, discussions with clients and paperwork, you might estimate that you will have 29 hours for chargeable work.
You then divide by 5 to get the average paid hours per day. In the example this would yield 5.8 hours per day.
Finally ask yourself how much you need to live on. There’s rent or mortgage, utility and council tax bills, food, clothing, holidays and other fun activities like eating out or visiting the pub and more. Plus there are always unexpected costs. From this you should be able to estimate the minimum amount you can live on after tax. Let’s say this is £24,000 per annum.
This is then how you can work out the minimum amount you need to charge per hour to survive. On average, there are 261 Mondays to Fridays in a year. In addition, there are 8 public holidays giving 253 working days.
You should now ask how many days holiday you will take, 25 is a usual number for the UK but if you’re starting a business you might restrict yourself to 10. In addition, you might estimate that you will spend some days sick, say two, and some days training, especially if maintaining certain qualifications is a legal requirement in your trade. That might be two as well. In addition, you might estimate how many days you will spend not working because you don’t have any work, let’s say 12, one day per month.
The result is 253 working days, less 26 days from the example, leaving you with 227 paid days.
If you estimate that your insurance, travel and van costs, material costs, accounting and any other come to £5,000 each year, you now have all the information that you need, apart from the tax calculation.
Here’s the example of an hourly rate calculation, the daily rate isn’t covered but has to allow for the same points:
Working hours in the year = 227 days x 5.8 hours/day = 1,317 hours.
Income needed after tax and costs = £24,000 = £2,000 per month
You estimate that all business costs excluding materials that you will charge to customers explicitly will be £5,000 per year or £417 per month.
If you Google “stepchange self employed income” there is a calculator that will enable you to work out exactly how much income tax and national insurance you will pay as self-employed.
Put in the monthly figure for business costs, £417 in this case, then put in the “What do you get paid” as (income needed after tax and costs + business costs) *1.1 = (£2,000 + £417) * 1.1 = £2,659. Then press calculate.
See if “Your monthly take home pay” is now what you need, in our example £2,000. It’s a bit less in the example so keep adjusting “What do you get paid” upwards until “Your monthly take home pay” is your target amount, in the example £2,000.
Then record “Your monthly take home pay”, in our case £2,820 yields £1,966 per month which is close enough.
Multiply “Your monthly take home pay” by 12 and divide by the total number of hours you believe that you will be paid for each year.
For example this is (£2,820*12)/1,317 = £25.69 per hour.
This tells you that if all your assumptions are correct, if you charge £25.69 per hour, you will end up with £24,000 per annum after tax and costs. The hourly rate is usually quite a bit higher than people expect, which is why it’s vital to do the calculation.
Cheapskates
It is true that some clients will always opt for the cheapest quote or hourly rate but being the cheapest normally means you will go out of business. It’s the cheapest ones that don’t survive. Also, low prices can attract customers who want everything for nothing and may fight you over every penny.
Plan your boundaries
It’s a good idea to decide in advance what geographical area you will cover and exactly what work you will undertake. Covering too wide an area can waste a huge amount of time in travel, not to mention the cost. However, you might be more flexible when you first start up and work is hard to come by. But as demand for your time rises, it might be worth pulling your boundaries in.
Deciding exactly what work to cover is slightly more tricky. None of us can be experts at everything. You will do a better, faster job when doing things you are thoroughly experienced in. So, for instance, if you are an electrical engineer you might specialise in solar or not do solar at all. You get the idea.
At the end of the day
Becoming a sole trader has lots of advantages which is why so many people have taken that route. However, it’s neither risk free nor trouble free. I hope that this article gives you some idea of what’s involved and helps you make the best decision for you and your family.
