You’ve been laid off from your job, and you’re applying to collect unemployment benefits. But instead of looking for another job, this time you want to finally start that business you’ve been dreaming about for years.
Can you use your unemployment benefits to finance your startup?
Several years ago, the Department of Labor launched an initiative for a program called Self Employment Assistance (SEA). The goal was to allow people collecting unemployment benefits to keep receiving those benefits at the same time they worked on starting businesses of their own.
That was back in 2012 when the unemployment rate was higher than it is now (the United States nation was just coming out from under the shadow of the Great Recession). But despite today’s low unemployment rates, not all of us are content to stay employees—and people still get laid off or otherwise become eligible for unemployment benefits.
So, can you still use those benefits to start a business?
State rules regarding unemployment benefits and how to qualify for them vary from state to state. In general, however, recipients typically have to prove they are looking for a new job in earnest in order to keep getting unemployment benefits.
When the SEA initiative was launched, the DOL encouraged states to create their own SEA programs. At one time, it even offered them funding to do so. But only a few states offer SEA programs today:
SEA programs don’t provide “easy money.” To receive self-employment assistance benefits, recipients typically need to demonstrate they’re starting a business with the potential to provide full-time income. They need to write a business plan, take classes to improve their business skills, or otherwise show that they’re serious about entrepreneurship.
If you live in Mississippi, Oregon, New Hampshire, or New York, check with your state’s unemployment insurance program via the links above to get details.
What if your state doesn’t offer self-employment assistance?
It’s still possible to lay the groundwork for your own business while you’re unemployed and receiving benefits. Keep in mind, however, that any income earned while you’re on unemployment will reduce your benefits. That’s true whether the income is from an outside source or from self-employment.
Here are some tips to help you use unemployment as a springboard for a startup.
- Toe the line.
Don’t try to game the system. Make sure to follow the rules regarding eligibility for unemployment benefits. Always report any income you generate. Review your state’s rules to see if there are ways you can stagger your income so as to minimize its effect on your benefits. For example, you might be better off having a client pay you in one lump sum, or spread the payments out over a period of weeks.
- Explore the industry you want to enter.
Many people dream of starting businesses in industries they’re not really familiar with. For instance, if you’re a laid-off bookkeeper planning to turn your passion for home-baked pies into a food business, why not try looking for a job at a food business in the meantime? Even if you don’t get the job, you’ll learn a lot about the industry from going on interviews and doing research. (One caveat: Always clarify if there are any noncompete agreements before accepting a job, and never work for a business directly competitive with the one you hope to establish.)
- Use your time wisely.
Yes, you’re spending hours on job boards and composing resumes, so working on your business idea is probably the last thing you want to do. However, this window of time is highly valuable (you have income AND time to work on your idea) so don’t let it slip through your fingers.
Working with a SCORE mentor is one way to ensure you have someone to hold you accountable for making progress on your startup. The SCORE website also has tons of templates, guides, webinars, online training courses, and other resources to help you learn the ropes of starting your own business.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.