When you are independent, generating revenue to cover operating expenses or support growth plans is essential. Whether you are a freelancer, sole proprietor, or independent contractor, there may come a time when you need external financing to help cover your costs.
Types of Business Loans for Independent Entrepreneurs
There are different types of loans available for independent entrepreneurs, and the right loans and lenders depend on each individual’s situation. Here’s an overview of loan types and lenders:
Bank Loans
Banks are often one of the best options for obtaining low-interest rates compared to other lenders, helping you save money on long-term borrowing costs. However, banks may view your independent business as riskier than other businesses, especially if you have not built total revenue or stable, diversified income streams. If you do not have a credit score of 670 or higher and at least a year or two in business, you may need to consider other types of lenders.
Online Business Loans
Online business loans often utilize alternative data when reviewing a company’s credit. For instance, lenders may look at personal bank statements and bill payments that do not appear on personal or business credit reports. Using alternative data allows lenders to approve new business loans or freelancers that do not meet traditional bank business loan criteria.
Business Lines of Credit
Business lines of credit combine features of credit cards and business loans, establishing a credit limit you can borrow against at any time. Most business lines of credit from online lenders offer short repayment terms, typically ranging from six to 24 months. However, the short duration and ability to reuse the credit make them useful for covering short-term expenses as they arise.
Small Business Administration (SBA) Loans
SBA loans are business loans that are partially guaranteed by the Small Business Administration. Because SBA loans provide repayment terms up to 25 years, independent borrowers can extend payments over a long period. This reduces the monthly amount and frees up capital for use in other areas of the business. SBA loans also cap interest rates lower than many commercial loans.
Microloans
Microloans are business loans that are smaller in size than what you find in a standard business loan. While there is no standard for what qualifies as a microloan, small lenders may limit these loans to around $100,000 or less. For example, SBA microloan limits are up to $50,000.
Business Credit Cards
Business credit cards work well if you want to cover expenses that can be repaid quickly. As long as you pay off the amount due on the card in full each month, you won’t incur any interest on the purchases you made.
Personal Loans
Personal loans are loans taken out in your personal name rather than your business name. Personal loans work well for startups that do not have enough credit history to qualify for a traditional business loan.
Merchant Cash Advances
Merchant cash advances have high approval rates, making them an attractive option if you do not qualify for other business loans. Cash advance lenders approve you based on previous sales revenue, typically for businesses that accept credit or debit card sales.
How to Get a Business Loan When You’re Independent
Getting a business loan for freelancers can be challenging. But these strategies will help you get approved:
- Proof of
Stable Revenues. Revenue levels will play a role in obtaining approval and the amount of the loan. Most lenders look for at least $100,000 in annual revenue, but some lenders accept less than that. - Select a lender that welcomes freelancers. To increase your chances of approval, choose a lender that specializes in helping freelancers. You have a better chance of finding these loans with online lenders.
- Compare offers. You can pre-qualify with several lenders to compare loan amounts, terms, and interest rates. Pre-qualification allows you to see what you qualify for without undergoing a hard credit check that usually results in a slight drop in your credit score.
- Provide collateral. Since securing the loan with assets guarantees your ability to repay, lenders look more favorably on requests for secured loans.
Documents Required to Prove Self-Employment
As a freelancer or independent contractor, you may not have all the same documentation available as businesses that rely on employers. To prove you are earning income from freelancing, you will need:
- Personal bank statements
- Business bank statements, if separate
- Tax forms with Schedule C or SE included
- 1099 forms
- Financial statements of the business, such as balance sheets or reports from accounting software
- LLC formation documents, if necessary
Conclusion
When you are self-employed, the main challenge is increasing revenue to serve more clients, often with less capital than other businesses. Obtaining a business loan can give you the boost you need as long as you meet the lender’s requirements.
Frequently Asked Questions
How long should I be self-employed to get a loan?
Many lenders require at least two years in business to obtain a self-employed business loan, giving you enough time to build revenue. However, it is possible to get a loan in a year or less as long as the lender accepts startups.
Can I get a business loan if I am self-employed?
Yes, lenders will offer business loans to those working as freelancers or limited liability companies. You must meet the eligibility requirements to qualify. But you can increase your chances of approval by choosing a lender that welcomes independent business owners.
What income do lenders consider for self-employed workers?
Lenders consider all income you earn from your self-employment. They can verify this income through personal bank statements and tax returns.
Are independent contractors eligible for small business loans?
Yes, independent contractors are eligible for small business loans. According to the Small Business Administration’s definition, small businesses are eligible as long as they do not exceed a specified revenue threshold or number of employees. The limit varies by industry from 100 to 1,250.
Source: https://www.aol.com/small-business-loan-self-employed-163253794.html
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