Bank loans are great with low interest rates, but online lenders may be more accessible for sole traders.
Lenders are looking for steady income, often at least $100,000 a year.
If you can't get a business loan, credit cards and personal loans may be options
If you're self-employed, your top priority is to have revenue to cover your operating expenses and support your plans for growth. Whether you're a freelancer, sole proprietor, or independent contractor, there may come a time when you need outside funding to cover your costs.
Self-employed business loans provide the funds you need to achieve your short-term and long-term business goals. It can be used for working capital costs and other business-related needs, such as investing in marketing, equipment, and other products and services to help expand your business.
Let's take a closer look at the types of self-employment loans available and strategies that can help you get approved.
Compare loans for sole proprietorships
There is no self-employed business loan that is perfect for all sole traders. Instead, different business loans and lenders work well for different situations. Here's an overview of the types of loans and lenders you can compare:
|Ideal for these people
|online business loans
|business credit line
huntington national bank
Axion Opportunity Fund
|Corporate credit card
|short term loan
Ink Business Cash® Credit Card
|Seller cash advance
Types of loans for sole proprietorships
Freelancers and self-employed people have much the same access to business loans as other businesses, although their needs are different. You can choose the type of loan that suits your funding purpose.
Bank loan: Low interest rate is best
Banks tend to offer the lowest interest rates compared to other financial institutions, which can save you money on borrowing costs in the long run. However, banks may consider your self-employment to be riskier than other businesses, especially if you haven't built up a gross income or a stable or diversified income stream. If you have a credit score of 670 or higher and do not have at least 1-2 years of business experience, you may need to consider other types of financial institutions.
Insights on bank rates
You're also more likely to be approved by a small, local bank. The 2023 report on non-employer companies found that small banks approved 37% of individual member companies that applied, compared to 29% for large banks.
Online business loans: perfect for accessibility
Online business loans often use alternative data when reviewing a business' credit. For example, a lender may look at personal bank statements or bill payments that are not reflected in the person or business's credit score. Using alternative data can help online lenders approve startups and freelancers who don't meet the guidelines for traditional bank business loans.
Online lenders also tend to have less stringent lending requirements. Many companies hire startups who have been in business for at least six months and have personal credit scores in the low 600s. Some lenders plan to lower credit score requirements even further, offering loans without business requirements or with credit scores as low as 450 for a period of time.
Business Line of Credit: Great for flexible spending
A business line of credit combines the features of a credit card and a business loan, setting a loan limit that you can borrow at any time. Most business lines of credit from online lenders offer short repayment terms, typically between 6 and 24 months. However, the shorter term and the ability to reuse the credit can help you cover short-term expenses as they arise.
According to the Federal Reserve's 2022 Small Business Credit Survey, approximately 57% of non-employer startups and 68% of existing businesses need loans to pay operating costs. A business line of credit provides the flexibility you need to cover these everyday expenses.
Your line of credit is already approved, so you don't have to wait for loan approval before you can receive and use your funds. If you have a good credit score, they tend to offer interest rates as low as bank term loans. For example, a lender may offer interest rates on a line of credit starting at his 8%.
Insights on bank rates
According to the report, when businesses other than the employer need funding, these businesses are more likely to apply for a business loan (37%), line of credit (36%), or SBA loan (23%). . 2022 Small Business Credit Survey.
75% of non-employee startups apply for funding to expand their business, while 57% need funding just to cover operating costs.
SBA Loan: Best Repayment Terms
SBA loans are business loans that are partially guaranteed by the Small Business Administration. SBA loans have repayment terms of up to 25 years, allowing self-employed borrowers to continue repaying their loans over a long period of time. This lowers your monthly amount and frees up your capital for other areas of your business. SBA loans have lower interest rate caps than many business loans.
However, many financial institutions have strict requirements for receiving an SBA loan. For example, for SBA 7(a) and 504 loans, some lenders require a personal credit score of 650 or higher, at least his two-year start-up period and annual revenue of approximately $200,000.
If you don't meet the guidelines for a traditional financial institution, you can seek a self-employment loan through a Community Development Financial Institution (CDFI) or Community Advantage Financial Institution. These lenders focus on serving underrepresented communities and have relaxed eligibility requirements. We offer 7(a) loans, the SBA's most popular loan program, but only for loans up to $350,000.
Insights on bank rates
The SBA's weekly loan report includes information on SBA 7(a) and 504 loans. The best states for SBA loan approval are also listed (currently California, Texas, and Florida).
Microloans: Perfect for underserved communities
A microloan is a business loan with a smaller maximum loan amount than a standard business loan. There are no standards for what qualifies as a microloan, but microloans may cap these loans at around $100,000 or less. For example, the SBA microloan limit is $50,000.
Microlenders also tend to serve underrepresented business owners, such as minority business owners, veterans, women, and people in low-income communities.according to SBA press release in 2023, The SBA approves microloans because 5,500 Small and medium-sized enterprises. Of those, 35 percent went to Black-owned businesses and 15 percent went to Latino-owned businesses.
Business credit cards: perfect for short-term financing
If you want to cover expenses that can be paid immediately, a business credit card is a good option. As long as you pay off your card in full each month, you won't pay interest on your purchases.
With the best business credit cards, you can also earn perks and perks. Many cards offer 1% to 5% cash back on purchases, while others allow you to earn points that can be redeemed for travel.
As a freelancer, independent contractor, or sole proprietor, every penny counts, and a standard business loan doesn't give you the chance of zero interest rates. Business credit cards also welcome non-corporate businesses, and you don't need to be an LLC or corporation to apply.
Personal loans: perfect for new businesses
A personal loan is a loan taken out in an individual's name rather than a company's name. Personal loans can be effective for startups that don't have the credit history to qualify for a traditional business loan.
It is also possible to receive a self-employed business loan without establishing a legal business, but personal loans do not require the presentation of business establishment documents.
However, some personal loans have restrictions on how the funds can be used, which may limit your access to the funds. used for business purposes. You should read your loan agreement carefully to ensure that you are using your loan in accordance with the agreement.
Furthermore, IWhen you take out an unsecured personal loan, you don't need to back the loan with personal assets. Many business loans require you to sign a contract. personal guarantee,it isIf you cannot repay the loan, the lender can go after your personal assets.
Merchant cash advance: perfect for emergencies
Merchant cash advances have high approval rates, making them an attractive option if you don't qualify for other business loans. MCA lenders will typically approve you based on past sales revenue for businesses that accept credit or debit card sales.
Because MCA lenders rely on your sales history, they are more likely to approve companies even with poor credit scores, such as those with a personal credit score of 550. Many MCAs also approve funds quickly, sometimes depositing them within 24 to 48 hours.
However, MCAs are typically paid daily or weekly, which can put a strain on your business budget until the debt is paid off. MCAs also come with high fees that translate into interest rates of 50 percent to 100 percent or more.
Although you are guaranteed to get approved, they charge high fees, so merchant cash advances are best used as a last resort when you need funds for an emergency expense.
How to get a business loan if you are self-employed
Obtaining a business loan can be difficult for freelancers. However, the following strategies can help you get approved.
- Prove stable income. Your earning level will affect whether and how much you are approved. Most lenders look for at least $100,000 in annual income, but some will take less.
- Use a freelancer-friendly lender. To increase your odds of approval, use a lender that specializes in helping freelancers. You're more likely to find these if you use an online lender.
- Compare offers. You can pre-screen multiple financial institutions and compare loan amounts, terms, and interest rates. Pre-qualification allows you to see what you qualify for without going through the hard credit pulls that can usually lower your score slightly.
- Provide collateral. Because a loan is backed by assets that can be repaid, lenders will consider the loan at more favorable terms. Loan application secured by collateral.
Documents required to prove self-employment
Freelancers or self-employed business owners may not have all the same paperwork as an employer-based business. To prove that you have income from self-employment, you will need:
- personal bank statement
- Corporate bank statement (if separate)
- Tax forms including Schedule C or SE
- 1099 form
- Corporate financial statements such as balance sheets and accounting software reports
- LLC formation documents (if required)
The main challenge of being self-employed is increasing revenue to serve more customers, often with less capital than other businesses. A business loan can help you get the funding you need, as long as you meet the lender's requirements.
Many financial institutions require at least two years of incorporation to qualify for a self-employed business loan, giving you plenty of time to grow your revenue. However, as long as the financial institution accepts startup companies, it is possible to receive a loan within a year.
Yes, lenders offer business loans to freelancers or self-employed people as LLCs. To qualify, you must meet eligibility requirements. However, you can increase your chances of approval by working with a lender that welcomes self-employed individuals.
Lenders will take into account any income you earn from self-employment. They can verify this income through your personal bank statement or tax return.
Yes, independent contractors are eligible for SBA loans. Under the SBA's definition, small businesses can qualify as long as they don't exceed certain revenue limits or employee numbers. Limits vary by industry and range from 100 to 1,250.