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Self Employed person enquiring about a loan

The Top 5 Loans for Self-Employed Individuals

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. A few freelancers describe the ebbs and flows of self-employed life as "feast" or "famine."

But 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, so taking 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.

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.

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.

Flexibility

Once your clients pay your invoices, or you gain more work, you can start paying your loan back. The nice thing about installment loans is that you can take out another one down the road if you need to.

Maybe you need $500 to tide you over for a few months. You pay it off and, in a year, find you need to take out $1,000. Not a problem!

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.

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.

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.

As a sole proprietor who may deliver or dabble in several services, proving business income may be more challenging. 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.

Invoice Factoring

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

Freelancers that 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.

What You Need to Know About the Application Process

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

Other things to consider include how much you want to borrow, the type of loan you want, 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

Before applying for a line of credit or a loan, consider how much you want to borrow. 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 a month 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 a month. 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.

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