Self Employed person inquiring about a loan.

Top 5 Loans for Self-Employed Individuals

Published on: November 21, 2023

Congratulations! You decided to take a leap of faith and work for yourself! While being self-employed comes with the perks of being your own boss, it also comes with unpredictability.

Namely, your finances are a mix of thick and thin months. Sometimes, it can be challenging to depend on a steady income stream. Freelancers often describe the ebbs and flows of self-employed life as "feast" or "famine."

So, what do you do when you hit a lull, gigs aren't available, or your clients are slow to pay? You've still got to pay the bills. Taking out a small, short-term loan can keep you afloat. That said, creditors are more hesitant to lend to self-employed individuals.

However, you shouldn't let that stop you from searching for and taking out a loan if that's what you need to do. Here is a list of the top five loans for self-employed individuals and how to go about the application process.

Key Takeaways

Self-employed individuals can secure loans with an organized approach and the right lender.
Despite complexities, a variety of lenders cater to the unique circumstances of self-employment.
Alternative income verification methods, including tax returns, bank statements, collateral, and co-signers, strengthen self-employed loan applications.

Can You Get a Loan When You’re Self-Employed?

Yes, a self-employed individual can get a loan with an organized approach with the right lender.

Securing a loan while being self-employed might appear complex, but rest assured, many options exist to address your financial needs. Traditional lenders often prioritize stable employment, which can pose challenges for self-employed individuals.

However, the landscape is evolving, and numerous lenders now offer tailored solutions to accommodate the unique circumstances of self-employment.

Whether you're seeking a mortgage, personal loan, or business funding, understanding the requisites and avenues available to self-employed individuals can pave the way to a successful loan application.

Why It’s Difficult for the Self-Employed To Get a Personal Loan

Self-employed individuals often experience income variability, influenced by factors such as seasonality, project-based work, or business cycles. This dynamic income pattern introduces an element of uncertainty that makes lenders apprehensive, as they traditionally prefer a consistent and predictable cash flow. The lack of a regular paycheck, a hallmark of traditional employment, leaves lenders concerned about the borrower's ability to meet monthly repayment obligations consistently.

Moreover, the self-employed often encounter difficulty in providing verifiable proof of income that aligns with the rigorous standards set by lenders. Unlike employed individuals who can produce straightforward pay stubs, those working for themselves must navigate a landscape of invoices, contracts, and business receipts, which may not always align seamlessly with the documentation requirements of conventional lending institutions.

Additionally, there exists a prevailing perception among lenders that self-employment carries an inherent risk, contributing to hesitancy in extending credit. The absence of an employer overseeing financial stability and the potential volatility of entrepreneurial ventures can be perceived as elevated risk factors, causing lenders to exercise caution when considering loan applications from self-employed individuals.

How To Prove Your Income When Your Self-Employed

Proving income can be a sticking point for self-employed individuals. Fortunately, there are alternative methods to demonstrate your financial stability beyond traditional pay stubs.

1. Tax Returns and Tax Transcripts

Lenders often request tax returns and transcripts to assess your income stability. Ensuring your tax documentation is up-to-date and accurate is crucial (more on deploying your 1099 effectively below).

2. Bank Statements

Regularly updated bank statements can provide a real-time snapshot of your financial health, offering lenders insight into your cash flow.

3. Collateral

Offering collateral, such as property or valuable assets, can increase your chances of loan approval by providing additional security for the lender.

4. Add a Co-Signer

Having a co-signer with a stable income and good credit can significantly strengthen your loan application.

Leveraging Your 1099 To Secure a Loan and Proving Your Income

Unlocking financial opportunities through a 1099 income involves a strategic approach to securing emergency funding. As a 1099 worker, your income structure differs from traditional employees, necessitating a tailored approach when seeking loans.

To enhance your chances of loan approval, start by meticulously organizing your financial records. Compile documentation that showcases your income consistency, such as bank statements, tax returns, and invoices. This transparent display of your earnings helps lenders assess your financial stability and repayment capacity.

Communication is paramount when interacting with lenders. Clearly articulate your 1099 income structure, emphasizing any regular clients or contracts that contribute to your financial reliability.

Additionally, explore lenders who specialize in serving self-employed individuals, as they are more attuned to your income model. While a steady income stream might not mirror that of traditional employees, presenting a clear financial narrative can bolster your loan application's credibility.

Loans for Self-Employed Individuals

1. Installment Loans

An installment loan lets you borrow a fixed amount, which you pay back over time. The time you have to pay back the loan is also fixed. For example, you borrow $5,000 from your lender and agree to pay it back over 36 months or three years.

Nonconventional or more flexible lenders often offer installment loans for self-employed individuals. You can borrow as little as $200 or as much as $3,000.

For example, Simple Fast Loans is a lender with an online application process that caters to entrepreneurs and the self-employed. You get a decision within minutes instead of waiting days or weeks for an underwriter to evaluate your paperwork. With a quick decision process, you'll get the cash you need to keep afloat.

2. Lines of Credit

A line of credit is similar to a credit card. You get a credit limit you can borrow against when you need extra money. The application and decision process doesn't take long.

However, the credit limit will depend on your risk level and estimated income. Therefore, you may ask for a certain number on your line of credit application. Typical amounts are between $200 and $1,500.

Let's say you're approved for a $1,000 line of credit. This line stays open as a revolving account, like a credit card. So, in your first month of freelancing, you borrow $500 against your $1,000 line of credit.

During your second month, you pay back $250. For the next three months, you pay about an additional $100. Your balance is now down to $150, but you must borrow another $300. You can do this, bringing your outstanding balance up to $450.

3. Registration Loans

Do you have a car you can use as collateral? A registration loan might be right for your situation. A registration loan works like a mortgage.

In exchange for a predetermined loan amount, you put up your vehicle as collateral in case you can't pay the loan. If this happens, the lender takes possession of your car and sells it to pay off your loan balance.

However, this doesn't mean you give up your car. You only have to relinquish ownership if you default on the registration loan. As long as you make your payments and pay off what you borrowed, there's nothing to worry about.

Plus, a registration loan does not require you to own your car. So, you could still be making payments on it. The amounts you can borrow on a registration loan are usually up to $1,250. In addition, these loan types may only be available in some states.

4. Personal Loans

The fourth option for self-employed individuals is to take out a personal loan. These loans do not require you to prove that your business generates a minimum amount of income.

Proving business income may be more challenging as a sole proprietor who may deliver or dabble in several services. Say you drive for a rideshare company, evaluate social media ads, and write blog posts. You can see how it's not easy to categorize your business.

It's not necessarily a business at all. However, you are still self-employed and generate your income through freelance gigs. A personal loan considers your credit score, previous employment history, education, and other factors.

The amounts you can borrow under personal loans can also range up to $50,000. So, as long as you think you can comfortably pay the amount back, personal loans can be a way to supplement your freelance income during lean times.

5. Invoice Factoring

You might qualify for invoice factoring if you have an established freelance business and invoice your clients. This is when a lender fronts the amount of your outstanding account receivables.

Freelancers who invoice and wait for their income to come in may prefer invoice factoring. This way, they don't borrow more than their "guaranteed" revenue. However, some lenders may require a substantial minimum monthly income of $10,000.

Invoice factoring is best for self-employed individuals who have been in business for years. These individuals usually generate an above-average income, delivering highly valued services like web design.

Applying for Self-Employed Loans

Are you considering applying for one of the top five loan types for self-employed individuals? You'll need to know and check some things before you do. One of those is your current credit score.

Other things to consider include how much you want to borrow, the loan type, and the documents you'll need with your application.

Credit Score

This one is relatively easy to get. You can get your credit report online within minutes, as you're entitled to at least one free report a year. First, check your credit report from each agency to make sure everything is correct.

These issues can negatively impact your credit score if there are errors and omissions. However, you'll need to file a report to dispute any items on your report. In addition, you'll want to file separate reports if more than one bureau has something wrong.

That being said, your credit score won't automatically be on your credit report. Some banks offer this as a complimentary service as part of your credit card, checking account, or savings account. If you have this service, use it. For those who don't, you'll need to pay extra.

How Much to Borrow

Consider how much you want to borrow before applying for a line of credit or a loan. Don't go for the jugular just because you can. It's better to borrow only what you think you'll need.

Remain conservative because you do need to pay these loans back. Not doing so can damage your credit and ability to get future financing. Better yet, calculate what you need to borrow based on conservative estimates.

Say you have three clients that typically pay $1,000 each. At a minimum, monthly revenue from each client never falls below the $1,000 mark. So, you can estimate your monthly income at $3,000.

Yet, you need $500 more monthly to keep your business running and pay your bills. You're working on getting a fourth client that you estimate will also pay you $1,000 monthly. So, stick with a loan of $500 a month until you secure that fourth client.

Gather Documentation

Many lenders need proof of identity, account statements, and tax forms during the application process. Of course, some lenders might require more documentation than others, but getting these items in order doesn't hurt. You want to limit the number of applications you put in, though.

That's because the more inquiries there are on your credit report, the lower your score will go. So, check each lender's requirements and narrow down which ones you'll be applying with — plan on gathering social security cards, driver's licenses, or passports.

You may also need a copy of your business plan, business license, tax filing forms from the past two years, and account statements. This includes statements that show client payments or revenues.

Final Thoughts

Self-employed individuals do not have traditional income sources and like it that way. Big banks and conventional lenders may not, as conventional lenders often perceive variable income as a risk. In addition, freelance income that's more difficult to verify raises red flags for lenders.

However, not all is lost when securing a loan to help you through slow periods. For example, some lenders work with self-employed individuals and accept other criteria to make approval decisions.