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 a business, like you’ve been dreaming of for years. Can you use your unemployment benefits to finance your startup?
Back in 2012, the Department of Labor announced its initiative for a program called Self-Employment Assistance (SEA) that would allow people collecting unemployment benefits to keep getting those benefits while starting their own businesses.
At the time, of course, the nation was just recovering from the Great Recession. Today, the employment picture is much brighter and the unemployment rate is lower. But still, not everyone is happy to remain an employee (if you were, you probably wouldn’t be reading this). And despite low unemployment rates, there are still many people who are eligible for unemployment benefits for one reason or another.
Each state has its own rules regarding who can file for unemployment benefits and how to qualify. However, most of them require the recipients of unemployment benefits to continually prove that they are searching for a new job, or lose their benefits.
The DOL encouraged states to create their own SEA programs and at one point, provided funding to do so. Today, however, only a few states offer SEA programs:
Of course, this isn’t “free money” or easy money—far from it. In order to receive self-employment assistance benefits, recipients generally must prove that they are starting a legitimate business by taking steps such as developing a business plan and attending courses to gain the business skills they’ll need to start their own ventures. (If you are in one of the four states offering SEA programs, check with your state for specifics.)
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So what if you’re not in one of those four fortunate states? Generally, any income that you earn while drawing unemployment benefits will reduce your benefits. Of course, ultimately you want to rely on your self-employment income, but in the meantime, you might need those benefits to keep going. So while you can start a business during your period of unemployment, you need to be careful about how you do so.
Here are some tips for making the most of your period of unemployment by launching a sustainable business venture:
- Follow the state rules. Be sure you clearly understand how your state’s unemployment benefits work. It’s important to cross all the t’s and dot all the i’s if you want to receive the benefits you are entitled to. This includes honestly reporting any self-employment income (or other income) that you generate.
- Look for employment in the industry you want to enter. Are you planning to start a business in an industry that’s new to you? For example, maybe you were laid off from your bookkeeping job and now want to turn your passion for home-baked pies into a food business. See if you can apply for jobs at bakeries, food-service businesses, or other places where you can learn more about the industry you hope to enter. (Just don’t try to work for a business directly competitive with the one you hope to establish, and clarify any noncompete agreements before accepting a job.)
- Look for a part-time job. A part-time job could be just what you need to keep yourself afloat while your new business gets off the ground. However, be sure to check if looking for part-time work will affect your unemployment benefits. Do you have to look for full-time work in order to keep receiving benefits?
- Make the most of your time. You have to spend a lot of time looking for work to keep your unemployment benefits going. After hours searching job boards or sending resumes, working on your business idea may be the last thing you want to do. However, it’s important not to waste this valuable window while you have both some income and some time to work on your idea.