Self-employed individuals, whether they are independent contractors, gig workers or small business owners, often face challenges getting small business loans. 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!
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. Big picture, it 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.
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 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 lenders requirements to understand whether you may qualify.
Line of Credit
COVID-19 relief loans for self-employed individuals
Early in the coronavirus pandemic, Congress passed the CARES Act which created a new category of SBA loans under the Paycheck Protection Program (PPP). Paycheck Protection Program loans were made available to those who are self-employed, including independent contractors and gig workers, in an amount equal to 2.5 times payroll costs (or 2.5 times net profit or gross income for the self-employed) PPP loans were included in the Economic Aid Act passed at the end of 2020, and more funding was made available for both first draw and second draw PPP loans. PPP loans that are used properly are eligible for loan forgiveness, essentially turning them into a tax-free grant.
However, the PPP loan program officially ended March 31, 2021, with an additional month to process pending applications.
In addition, in early 2020, the entire US was declared a disaster area for purposes of the SBA Economic Injury Disaster Loan (EIDL) program. That made EIDL loans, which are low-interest loans (3.75% interest rate for small businesses, 2.75% for nonprofits) with a 30-year repayment period, available to businesses nationwide impacted by the pandemic.
The CARES Act also included an EIDL grant of up to $10,000 that did not have to be repaid. That grant program was expanded in 2021 with a Targeted Grant of up to $10,000 for certain qualified businesses that received an EIDL grant previously and did not get the full amount, as well as an additional $5000 for hardest hit businesses. (There are additional eligibility standards for these grants. )
The EIDL loan must be repaid but the grant does not. The SBA is still accepting EIDL loans from small business applicants, including gig workers and independent contractors, at SBA.gov.
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, 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 and grow your business.