While those working in sales can make a great income when getting paid on commission, there’s always the risk that when sales don’t close, there’s no commission check. And lenders know that too. That can make it more difficult for salespeople who are paid on commission to get a home loan or other types of loans.
If you’re self-employed as an independent contractor with commission-based income, you may have unique challenges finding financing.
What Are The Options For Working Capital Finance?
First, if you want to qualify for business financing, it helps to set up a formal business structure such as an LLC or S Corporations. (Of the two, an LLC is generally one of the easiest to start, but do consult your tax or legal advisor to determine what’s best for your business.) Business lenders may take your business more seriously when you have taken steps to form a business entity.
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You may also be able to enjoy tax benefits depending on the types of business you set up and how it’s taxed.
It is also smart to use a business bank account for your business income. Lenders may use business bank accounts to verify business income, including commission-based income.
The main types of small business financing used for working capital include:
- Business lInes of credit
- Merchant cash advances
- Invoice financing
- Short-term cash flow loans
- Business credit cards
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Variable Income Can Make Some Loans Difficult To Qualify For
Income that fluctuates widely may make it more difficult to qualify for certain types of loans, such as mortgages, auto loans or small business loans. However, if your average commission income is fairly steady and you have at least two years of commission income, you may have more success finding a loan for commission income.
There’s another twist when it comes to qualifying for small business financing. While a mortgage lender may be perfectly fine with the fact you have income form one source (a job), small business lenders often want to see that income comes from more than one source. That way, if you lose a major client, you’ll still have other income coming in.
It’s not really equitable: why should income from one job count more than income from one client? And it doesn’t apply to all lenders. But it’s also not uncommon and a factor business owners should keep in mind.
If your goal is to buy a home rather than get a business loan, keep in mind that self-employed home buyers will find the process of qualifying for a mortgage loan more difficult than it would be for borrowers with a full-time job where the lender can obtain verification of employment. Expect to provide more documentation during the mortgage application process, but don’t let it discourage you.
Can I Get A Loan For My Services Business If I Work On Commission?
If you have a service-based business, you may be able to qualify for small business financing based on the revenue from that business. Keep in mind you may have to meet the following qualifications:
Minimum average monthly revenue verified by business bank statements. Every lender is different, but average minimum monthly revenue of $5000— $10,000 or more is typical. Some lenders will post minimum revenue requirements on their websites and Nav helps small business owners find financing based on their qualifications.
A significant number of small business lenders will check personal credit and some may check business credit. Lenders may require good personal credit, though some will check simply to avoid extending credit to applicants with significant credit problems.
You’ll also want to check if the lender has a minimum time in business requirement. Some lenders will only extend financing to small businesses with at least 1 or 2 years in business. A brand new business will find it much more challenging to get financing and may need to look at alternative options like business credit cards.
Business Loans Based On Revenue
Revenue-based business loans are available through a variety of lenders. The main types of financing that are based primarily on revenues are:
Business cash advances. Businesses with strong B2C (business to consumer) sales may get financing based on past sales. Since some of this financing is typically based on credit or debit card sales, not all options will be a good fit for sales professionals. However, there are variations of this type of financing for sales commissions.
Invoice factoring. This type of financing advances revenues from B2B invoices. Businesses invoicing other businesses may be able to get paid more quickly with this type of financing. That may or may not be a fit for the type of business you operate; but it’s worth exploring.
Commission-based financing. Speciality lenders may advance financing based on your past commission history. This type of financing may be available to insurance agents, financial advisors or real estate agents, for example.
Business credit cards. Don’t overlook business credit cards as a source of short-term financing. Most small business credit card issuers ask for information about total income for the year, and will accept annual income from all sources, not just the business. However, most small business credit cards do require good personal credit scores.
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Again, you may need to provide copies of bank statements to verify income, and some lenders may request copies of tax returns as well.
Business Loans Based On Business Credit
While some lenders will check business credit and use it as one factor when extending credit, few lenders will make an underwriting decision based solely on business credit scores. Still, good business credit scores may be helpful in qualifying for some types of business loans.
Net-30 vendor financing often relies heavily on business credit, but it’s used to purchase supplies you can pay for later. It’s not a source of financing that provides cash that can be used for any purposes.
Business Loans Based On Bank Statements
If you are paid on commission, expect that lenders will want to see evidence of these commissions, often in the form of bank statements showing regular deposits. If you’re operating as a business, it’s important to have those commissions deposited into a business bank statement. (That’s true even if you operate as a sole proprietor or independent contractor.)
Lenders For Commission Based Income Business Loans
The type of financing you’ll qualify for will depend on several factors, including the type of commissions you earn and lender’s requirements. Here are several lenders specializing in commission-based loan programs:
RealCommissions advances funds from pending real estate contracts. It serves licensed residential real estate agents who work for leading real estate companies across the United States. There is no credit check.
Premier Commission also offers commission-based financing for real estate professionals.
Point Funding specializes in financing for insurance agents and financial advisors. It offers loan amounts up to $50,000 and no credit check is required. It looks primarily at first-year commissions, renewal commissions, and past performance.
*All information about RealCommissions, Premier Commission and Point Funding has been collected independently by Nav. This financing is not currently available through Nav. You can find financing options for your business based on your business data through Nav.
Giggle Finance offers instant working capital financing for 1099 workers, independent contractors, consultants, app-based freelancers, and the self-employed. There are no credit requirements and applying will not impact your credit scores.
This article was originally written on August 14, 2023.
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