Being self-employed can offer numerous benefits, such as flexibility and autonomy, but it also comes with its share of challenges.
One of those challenges is obtaining financing for personal or business needs.
Traditional lenders may be hesitant to approve loans for self-employed individuals due to their inconsistent income or lack of a steady paycheck.
However, there are still various loan options available for self-employed workers, ranging from personal loans, business loans, and credit cards, to government programs and online marketplaces.
In this article we will explore these loan options, their requirements, and how to choose the best one for your specific situation.
Personal Loan Options for Self-Employed Workers
Personal loans can be used for a variety of purposes, such as unexpected expenses, emergencies, medical bills, debt consolidation, and home repairs. For self-employed workers, there are several personal loan options to consider.
1.1 Online Lenders
Online lenders have become increasingly popular due to their convenience and accessibility. They typically have more lenient requirements and offer competitive rates. Some online lenders that cater to self-employed workers include:
- LightStream: Requires a good to excellent credit score (660+)
- SoFi: Requires a good credit score and may ask for bank statements or tax returns
- Upstart: Requires a credit score of 300+ and considers only personal income (self-employed, other wages)
- Upgrade: Requires a fair to good credit score and two years of individual tax returns
1.2 Credit Cards
Credit cards can be an easier option to qualify for than personal loans, as they provide a line of credit rather than a lump sum of cash.
Major credit cards offer additional benefits, such as travel perks, exclusive offers, and discounts. Application requirements include verifying your annual net income, credit score, and debt-to-income ratio.
1.3 Payday Loans
Payday loans are designed to help borrowers in emergency situations but are not meant as long-term financial solutions.
These loans generally need to be repaid during your next pay cycle and typically cover smaller amounts between 500.
However, payday loans come with high annual percentage rates (APRs) and should be considered a last resort.
1.4 Co-signed Loans
If you are having difficulty qualifying for a personal loan, a co-signer can help improve your chances. A co-signer is someone who agrees to take on your debt if you are unable to make the loan payments. Adding a co-signer with good credit to your application can help you secure better loan terms.
Business Loan Options for Self-Employed Workers
There are several business loan options available for self-employed workers, including Small Business Administration (SBA) loans, business credit cards, and lines of credit.
2.1 SBA Microloans
SBA microloans are designed to help self-employed workers, sole proprietors, and independent contractors obtain funding for their businesses.
These loans range from 50,000 and can be used as working capital. SBA microloans are typically easier to qualify for than traditional business loans and may accept credit scores in the high 500s.
2.2 Business Credit Cards
Business credit cards function similarly to personal credit cards but are tied to business bank accounts and should be used exclusively for business expenses.
They can offer cash back on purchases, travel rewards, and other benefits.
To apply, you will need to provide information about your business, including its legal structure, estimated monthly spending, and employer identification number.
2.3 Business Lines of Credit
A business line of credit allows you to borrow up to a certain limit and pay interest only on the amount borrowed. This flexible financing option can be used to manage cash flow challenges or invest in business growth. Lines of credit typically have higher limits than credit cards but may be more difficult to qualify for.
2.4 Online Business Loans
Online business loans often have more lenient requirements than traditional bank or SBA loans. Borrowers may qualify with a minimum of six months in business and a personal credit score of 600 or higher. However, online loans usually have higher interest rates and shorter repayment terms.
Bank Loans for Self-Employed Workers
Bank loans can provide a set amount of funding for business expenses. To qualify for a small-business bank loan, you will typically need several years of business history and a good or excellent personal credit score.
Some lenders may require you to provide a personal guarantee or collateral, such as real estate or business assets.
Why Getting a Loan May Be More Challenging for Self-Employed Workers
Lenders often perceive self-employed individuals as riskier borrowers due to their inconsistent income and lack of a steady paycheck.
As a result, they may require additional documentation to verify income and assess creditworthiness. This can include bank statements, tax returns, and business financial statements.
How to Calculate Self-Employment Income for a Loan
To calculate your qualifying self-employment income for a loan, follow these steps:
- Combine Lines 12, 13, 30, and 31 on your Schedule C tax form.
- Repeat this process for the previous year’s income.
- Average the incomes if your two years’ prior income is less than your previous year’s income, or use your previous year’s income if it is greater.
Required Documents for Self-Employed Loan Applicants
When applying for a loan as a self-employed worker, you will need to provide various documents, including:
- Bills or forms that verify personal contact information and Social Security number
- Pay stubs (if applicable)
- Bank statements
- Federal tax returns, including Schedule C, Schedule SE, and 1099s for additional income
Preparing for the Loan Application Process
Before applying for a loan, it is important to gather all required documentation and assess your credit score. Knowing your score in advance can help you determine if you need a co-signer to improve your approval odds and loan terms. Being prepared and organized can also expedite the loan application process.
Building Credit as a Self-Employed Worker
Building credit is essential for self-employed workers seeking financing. Some strategies for building credit include:
- Paying bills on time
- Keeping credit card balances low
- Opening a secured credit card
- Regularly reviewing your credit report for errors
Frequently Asked Questions (FAQs) About Loan Options for Self-Employed Workers
How do I prove my income as a self-employed worker?
Lenders typically require self-employed workers to provide bank statements, tax returns (including Schedule C and Schedule SE), and 1099 forms for additional income to verify their income.
Can I get a loan with a low credit score as a self-employed worker?
While having a good or excellent credit score improves your chances of obtaining a loan, some lenders may work with self-employed workers with lower credit scores, particularly for SBA microloans or when using a co-signer.
What are the repayment terms for loans available to self-employed workers?
Repayment terms for loans available to self-employed workers vary depending on the type of loan and the lender. For example, SBA microloans have repayment terms up to six years, while online business loans may have shorter terms.
Final Thoughts on Loan Options for Self-Employed Workers
While obtaining financing as a self-employed worker may be more challenging, there are a variety of loan options available to suit different needs and circumstances. By exploring the various options, preparing the necessary documentation, and understanding the requirements, self-employed workers can secure the funding they need to grow their businesses or cover personal expenses.
