Self-employed individuals, whether they are independent contractors, gig workers, or small business owners, often face challenges getting small business loans. Having the right resources that can point you in the direction of the best options for your business can truly help to make the self-employment journey just a little bit easier. Here we’ll describe how to find and qualify for loans for self-employed business owners.
How to Get a Business Loan if You’re Self-Employed
When you’re an employee of another business, you can expect a regular paycheck. Your paystub makes it easier to apply and qualify for a car loan, credit card, student loan or mortgage because it provides documentation of your income. When you are self-employed, however, you likely don’t pay yourself formal payroll, and that lack of verifiable income can make getting self-employed loans more difficult. That means you’ll likely need to provide documentation that makes the lender comfortable extending financing to your business.
It’s important to note here that if you report self-employment income to the IRS (usually on IRS Form Schedule C that’s filed with your personal tax return), you can consider yourself a small business. That’s true even if you have not formally created a business structure and operate as a sole proprietor rather than an LLC or S Corp.
Yes, even an independent contractor or gig worker can be considered a small business owner!
Business Loan Options for Self-Employed
Here are some lenders you may want to consider if you are looking for self-employed small business financing. Remember to review each lender’s requirements to understand whether you may qualify.
Line of Credit
How to Apply for a Self-Employed Loan
When you’re looking for self-employed loans, you can apply for financing through a variety of sources. You can:
- Apply at a bank or credit union, though you’ll want to keep in mind that traditional financial instructions often prefer to work with well-qualified borrowers and the application process can take weeks or longer.
- Use a business loan broker who will attempt to find you financing through a variety of sources. Just make sure the broker is helping you find the best loan for your situation and is not trying to steer you into a product that is expensive and earns him or her the largest commission.
- Apply directly to lenders, including online lenders, that offer specific products. Product offerings may be somewhat limited, but this can be a good way to get a specific type of financing quickly.
- Go through an online marketplace (such as Nav) that matches you to a variety of loan options based on your qualifications. This allows you to learn about loan options you may not have even considered.
How to Qualify for a Self-Employed Loan
Qualifying for small business loans will depend on a variety of factors. The big picture boils down to the fact that lenders want to know the answers to two main questions:
- Can you repay the loan?
- Will you repay the loan?
To help answer these questions, they will often consider the following information as part of the loan application process:
Credit scores. Lenders may check the owner’s personal credit and/or the business credit of the business. A personal credit check may be a ‘soft credit check” that doesn’t impact your personal credit scores, but sometimes will be a hard credit check. If that’s of concern, be sure to ask the lender before you apply. Most lenders want to see good credit scores in the mid-600s or higher, though there are some types of financing that are more flexible. The lender may also check a business credit report and a business credit score as well. Learn how to establish business credit here.
Time in business. Many lenders prefer to extend financing to businesses that are at least two years old. There are exceptions, but options for new businesses are much more limited. Your date of incorporation is the easiest way to demonstrate time of business, but if that does not apply, you may use the date you received your Employer Identification Number (EIN), business license, or the date you filed a fictitious name (DBA) as your start date.
Revenues. If you are trying to get a true small business loan (rather than a personal loan you use for business purposes), you’ll need to demonstrate that your business is making money. The lender may request business tax returns or business bank statements to verify those revenues. It may even ask you to link your business bank account to analyze revenues.
How Do Self-Employed Individuals Prove Income for Loans?
Proving income can be a potential barrier for many people who are self-employed, especially if they do not have a separate business checking account. Establishing your income doesn’t have to be hard.Here are some common records you may need to prove your eligibility:
- Business license
- A balance sheet
- Personal income tax returns
- Business tax returns (including schedules K-1, 1120, the 1120S)
- Bank statements from a business account
- Year-to-date profit and loss statement
Two ways that you can ensure these documents are accurate is through hiring a Certified Public Accountant (CPA), tax preparer, and accountant, or having accounting software that integrates all of your tax information like Quickbooks Online.
Tax professionals are prepared for this volume of work, but many business owners may like to be hands-on and use software to track their own finances. However, if your business is a sole proprietorship, it’s best to check on what’s needed because you may not have to provide business tax returns.
Furthermore, you can also create your own pay stubs for your business as proof of income and they can be given as an authentic indication of being in business. However, it’s important to note that the pay stub must look like a typical pay stub and include:
- Gross pay (the total amount you received for services rendered)
- Deductions such as state and local taxes, Medicare, and social security
- Net pay (the total amount after subtracting the deductions)
Types of Loans You Can Get While Self-Employed
Depending on your qualifications and needs, you may explore any of the following self-employed loan options:
Lines of credit. A line of credit allows you to borrow what you need from an approved amount. Lines of credit can be very helpful to businesses with fluctuating revenues, and seasonal businesses.
Term loans. If you need a specific amount of money for a project, you may want a term loan. This type of loan offers a fixed amount of money with a fixed repayment period. Monthly payments are typical though there are some term loans that may require weekly payments.
Invoice financing and factoring: If your clients are other businesses (known as B2B), then you may be able to get paid more quickly for those invoices by using invoice factoring or financing. Here the lender will often be more interested in the credit of your customer who will be paying the invoice, rather than your credit. You will likely have to provide the financing company with an accounts receivable (A/R) aging report.
Business cash advance. This type of financing offers an advance on future expected revenues by analyzing past revenues. It may evaluate credit or debit card sales or revenues coming into the business bank account. Applications for this type of financing can often be evaluated very quickly and may fund in hours or a few days. However, that speed may come with a cost; this may be an expensive type of financing that requires daily or weekly payments.
Microloans: These loans often come in loan amounts ranging from a few thousand to up to $50,000, and may be available to businesses that are younger or that have trouble getting financing. Microloans are often made by non-profit lenders, such as Community Development Financial Institutions (CDFIs).
Business credit cards: A business credit card isn’t just a convenient way to pay for items. It also offers a line of credit that can be useful when cash flow is tight. These cards may be available to brand new businesses, as the application is often approved based on the self-employed owner’s personal credit and income from all sources (not just the business.)
Business Loans vs. Personal Loans for Self-Employed Individuals
Although many people are their business as self-employed borrowers, it’s good to differentiate between getting a business loan versus a personal one. No matter what stage you may be in your self-employment journey, your financial situation will determine which type of loan may be best for you. Will you need a co-signer? Do you need to focus on debt consolidation? Are you in need of contractors or new materials?
Whatever the case, identifying what you get from a business versus a personal loan can charter a better financial path.
Here are the key differences:
|Business Loans||Personal Loans|
|Serve the purpose of specifically growing your business.||Can be used for any business or personal finance needs.|
|Are useful for funding entrepreneurial projects and keeping your business operational.||Can be used for funding business projects in addition to taking care of personal expenses.|
|Usually allow repayment over a longer period of time and a lower interest rate.||Typically comes with shorter repayment terms and a higher interest rate.|
|Offer much higher quantities of money, which can be in the millions.||Usually, only fund up to $100,000 (max).|
|Can be tax-deductible depending on that state’s law.||Are not tax-deductible.|
|Do not affect personal credit, unless applied with a personal guarantee (use of social security number versus EIN).||Require a personal guarantee and affect personal credit.|
If you’re in need of additional capital that offers wiggle room in what those funds are used towards, then a personal loan may be more suitable. However, if you need access to hundreds of thousands of dollars because your business is scaling and growing at a consistent rate, then opting for a business loan may be much more beneficial to you.
Ways You Can Use Your Self-Employed Loan
If you have received a loan, you will want to make sure you put it to good use. Ideally, you’ll use it to help your business grow, and not to put your business so deeply in debt that you can’t dig out. If you don’t have a lot of business experience and are unsure about the best way to use loan funds, consider working with a mentor. The Small Business Administration (SBA) has resource partners that provide free help to new and growing businesses. Your Small Business Development Center (SBDC), SCORE or other resource partner can help you at no cost. Find local help here.
If you received a PPP loan you must use it for specific purposes, primarily payroll. (Payroll can include the money you pay yourself as a small business owner, also referred to as “owner’s compensation replacement.”) Learn more here.
If you received an EIDL grant or EIDL loan, there are specific ways you can and cannot use that money. As with PPP you may use it to pay yourself but there are restrictions against paying the owner bonuses or other specific types of compensation. Learn more here.
Nav’s Verdict: Self-employed business loans
Self-employed people often find the process of getting a business loan frustrating. But if you are serious about being your own boss, then Nav can show you your best options for securing financing. You’ll want to take the time to build a business that is attractive to lenders so you are able to secure the financing you need to continue to maintain, grow your business, and cover business expenses.
This article was originally written on June 4, 2021 and updated on April 14, 2022.