So, you got tired of punching a time clock and having to answer to an array of supervisors and you went and did it: You ventured out on your own and said, “Yes, I want to be my own boss.”
And things are going really well. However, you’re also thinking that down the road you’ll need a loan. You get to thinking, “Are their loans available if you’re self-employed?”
It’s a very good question: Maybe you’ll need a new car soon. You’ve been debating whether or not to move to a new home. You’re worried about having enough working capital for your business.
The reasons don’t matter – any and all of them are important.
But now you have a different income status. And since you’re no longer collecting a steady paycheck form an employer, some lenders may see your situation as risky.
There are borrowing opportunities out there and loans for people who are self-employed. So, here is a bit of information on what you might expect as you begin the process for a loan now that you’re self-employed.
Explore Your Loan Options
The two basic categories of borrowing options you have are:
- Traditional banks and lenders and
- Alternative lending companies.
Each will have their own criteria for evaluating and approving loan applications. And the requirements for documentation will most likely vary.
Also keep in mind that why you need the money and the amount will be factors.
The information here is to give an overview of some general options for you to explore in depth and match with your specific circumstances.
Traditional Banks and Making Loans to Self-Employed Professionals
The application process for a bank is thorough and will rely heavily assessing your income/debt ratio. Your financial records will reveal a profile of the “well-being” of your business. Even if you’re a self-employed loan applicant and are the only person in your business or service, you’ll still be expected to demonstrate that you’re earning a profit and have a stable income flow.
Here is a list of common documents a traditional bank might require when evaluating an application for a self-employed professional seeking a loan:
- Tax returns to show stability of income
- Personal and/or business credit report
- A list of annual expenses
- A list of assets
- Profit/Loss statements
As a small business owner or independent contractor, you will be evaluated with more scrutiny. Some self-employed loan-seekers don’t have significant assets that could be viewed as collateral, especially if you’re just starting out. And while you may be earning a profit, that may not be enough to inspire confidence in the lending institution.
However, if you’re more interested in working with a traditional lender, you may want to try applying online to the various banks and traditional lending institutions. Applying online puts these companies in the position to compete for your business.
Can a Home Equity Line of Credit Be Used as a Self-Employed Loan?
Home equity lines of credit are loan products most often offered through traditional banks. What might make this a loan option if you’re self-employed is that by using the equity in your home your line of credit is secured.
Expect the same rigorous review of your self-employed loan application, however, there are some distinct advantages to a line of credit:
- Potential for high loan amounts (based on home value)
- Your loan is secured (by your real estate)
- Monthly payments of interest only
- Working capital as you need it
Many small business professionals like the idea of having additional assets at their disposal when cash flow is slow.
If your line of credit is $60,000 and you have borrowed only $10,000, you have an additional $50,000 in your account when you need it.
The interest rate is variable, but the interest-only payments can make this fit well into your budget.
Alternative Choices for Loans for Self-Employed Individuals
The easiest way to explain “alternative lending” is to think of it as a broad term that involves any option outside of a traditional bank loan.
This method of operation is considered alternative because it may utilize different kinds of capital (e.g. real estate, a car title, an expensive piece of jewelry, outstanding payables, etc.).
Alternative lenders may also have other review processes or loan terms that differ from a regular bank. A few examples might include:
- Flexible repayment schedules
- A simplified application process
- More lenient approval requirements
- Usually provide cash distribution quickly
- May not require a credit report
The details will vary not only from one type of lender to another, but among similar alternative lenders themselves.
Since there are traditional banks and lenders and “everybody else,” here is a list to outline different choices when your regular bank loan for your self-employed enterprise doesn’t get approved:
Small Business Loans
For many self-employed people pursuing loans the primary resource for funding is the Small Business Association (SBA).
For an SBA-guaranteed loan, the self-employed loan applicant will most likely be required to submit the same kind of personal and financial documents (if not more) required by traditional banks. The good news is the SBA has a mission to help develop and support small businesses. That means while there’s a greater potential to have the loan for your self-employed business venture approved. However, don’t be surprised if the application process is more arduous.
It’s important to note that a key difference between an SBA-guaranteed loan and other types of alternative borrowing options is the loan acceptance process has stringent guidelines about the business itself and how those funds can be used.
Overall, the loan must be for a “sound business purpose.” This means the business, business idea and/or business plan must hold up to scrutiny. A few considerations listed on SBA.gov include:
- Size of business
- Supplies or services being provided
- Use of loan proceeds
- It has to be a legitimate business (e.g. no pyramid sales, gambling)
Of course the self-employed loan applicant will be assessed on their ability to repay the loan and will need to have good credit and personal histories. Unlike some alternative loan options for the self-employed the loan amounts are quite high: A microloan of $5000 is typical and the average small business loan amount is more than $350,000.
In addition, there are many other organizations and professional business associations other than the SBA that focus on making small business loans:
- Small Business Development Centers
- National Association for the Self Employed (NASE)
- The nonprofit organization SCORE
If this is a route that appeals to you, it’s easy to do additional research on the topic for self-employed loans and borrowing options.
Getting Approved for a Payday Loan When You’re Self-Employed
Payday loans are mostly associated with traditional workers receiving a steady paycheck. This is because the basic loan agreement is based on the payday company lending you money with the stipulation that those funds are repaid at your next pay period. Most often the debt is cleared when the company withdraws the money from your bank account electronically.
However, with the growth in the payday industry, some lenders are looking to make loans to self-employed business professionals as well.
A hallmark trait of payday loans is the streamlined application process – often online. In additional the documentation requirements are minimal – usually your two most recent paystubs.
That’s obviously less clear-cut when making a loan for someone who is self-employed.
When seeking a payday loan when you’re self-employed, the lender might request bank statements – maybe three to four months’ worth – to see a consistency in deposits. Getting approved for a payday loan when you’re self-employed, might also require proof of any purchase orders or invoices.
Even though the payday lenders that make loans to self-employed individuals have expanded their potential client base, the payday loan terms and features are still what you would typically expect:
- Smaller loan amounts (<$500)
- Short loan term – usually two weeks
- The debt is repaid in full
One benefit to getting a payday loan when you’re self-employed is you’ll still be able to get money fairly quick. Maybe not the “24 hours or less” time advertised, but perhaps in a day or two.
And if you’re crunched for cash and know you’ll be receiving client payments is a week or so, this could be a reasonable option. Just don’t borrow more than you can repay because that balloon payment at the end can be taxing on your operating cash.
Now Auto Title Loans Help Self-Employed Professionals
As with payday loans, auto title loans have been around for a long time. And with a little creativity (and financial stability) an auto title loan can also be used as a cash loan when you’re self-employed.
Because an auto title loan bases your loan amount on the value of your car – or at least a percentage of that value – you will have the opportunity to get a larger loan amount, if that’s what you need.
The prequalification process of a title loan application is based on the year, make, model, and mileage of your vehicle. However, when it comes to discussing the loan terms you’ll need to prepare alternative ways to document your income:
- Recent bank statements
- Tax returns
- 10099-MISC forms from clients
You might even be able to supply the title loan company with a few paystubs, if you pay yourself regularly (through your business checking account).
An additional benefit to some borrowers is that even if you’re self-employed, there’s no credit check.
As with any kind of loan, it’s essential you borrow what you need and understand the loan terms. Some auto title lenders charge higher interest rates and that represents a greater financial risk you’re taking on. To make this a worthwhile loan choice for your self-employed business services, take on a smaller loan amount and/or shorter loan term.
Can You Get an Installment Loans if You’re Self-Employed?
Many people who are self-employed turn to installment loans for their funding needs. An installment loan is an unsecured personal loan that is repaid in scheduled payments. The term of the loan can be discussed at the time of application, however the installment loan can be for a few months or extend it over a few years. This gives the self-employed loan applicant a great deal of flexibility.
A key benefit to an installment loan is the fixed monthly payments: The smaller the payment, the longer the loan term. That might work better in the scheme of your budget, but you’ll be carrying that debt for a while. You’ll want to take a close look at where your business is now and where it’s headed, to know that you’ll be able to repay that debt for that longer length of time.
A few features of an installment loan are:
- Potential for sizable loan amounts
- Lower interest rates compared to some loans
- Can request low monthly payments
- No balloon payment at the end
When you’re self-employed and opt for an installment loan, you’ll want to be clear about who is getting – and hence responsible – for the loan: You personally or your business.
When you apply for your installment loan you might not have the convenience of an online application process. As with any of the other untraditional loans being made to self-employed professionals, your financial paperwork is more complicated than what will appear on a paystub.
It’s best to research potential lenders first and get a sense of what they have to offer any borrower, even if they’re not self-employed. Check for interest rates, any charges or fees they levy, and the approximate time it takes them to disperse the loan funds.
When you have a few candidates, get your basic financial information in order so you can better answer any questions they may have. Basically you’re screening them to see if they’re a lender you want to work with. In turn, they’re screening you to get a sense of your creditworthiness and your ability to qualify for (and repay) a loan.
Your small business expertise and services are unique and while you may not get funding from a large bank or lender, there are plenty of options for you to get a loan when you’re self-employed.
It’s really a matter of finding the opportunities that really match where you’re at and how you intend to grow your business. Don’t forget to prepare for possible slumps in your work.
And in the end, it’s really no different than getting a loan when you have a steady paycheck – don’t take on more than you can repay.