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Lenders look for applicants who have consistent income and a history of making on-time payments. For individuals who work as freelancers or independent contractors, meeting those requirements can be challenging.
Fortunately, there are loans for self employed people who don’t have the luxury of steady paychecks. To show income consistency, a lender may ask for recent tax returns and bank statements.
Business Loans
Whether you’re a freelancer or own your own business, at some point you may need outside funding to cover expenses or support your plans for growth. A loan for self employed people can help. But the process for qualifying can be more rigorous than for a more formally structured business. You’ll need to provide additional documentation, and lenders have different requirements for evaluating whether you can afford loan payments.
Lenders typically hold independent contractors and sole proprietors to higher lending standards than more formally structured businesses like limited liability companies or corporations. That’s because there’s no legal separation between an entrepreneur and their business, meaning personal assets could be at risk if the business runs into financial trouble.
That’s one reason it’s important to keep loans that don’t require payslips organized records, including tax documents, of your business earnings and expenses. If you can show steady revenue and a solid plan for the future, lenders may be more willing to extend credit. If you don’t meet traditional lending requirements, consider working with a community development financial institution or community advantage lender that specializes in serving underrepresented communities and can lower loan requirements. You also might look for a microloan from the Small Business Administration, which has loan amounts as low as a few thousand dollars. You might also consider a business credit card, which can be accessed quickly to handle smaller business expenses.
Personal Loans
Many traditional lenders use income verification documents, such as pay stubs or W-2 forms, to determine whether a consumer can afford to make a loan payment. But this becomes challenging when a consumer is self-employed, as income from business ventures can vary monthly.
Personal loans for the self employed can help consumers cover expenses and improve their cash flow without having to place any collateral on the line. This financing option may also be available through lenders that aren’t traditional financial institutions, such as credit unions or online marketplaces.
However, these alternative lenders may have more stringent requirements than banks when it comes to providing proof of income. Typically, applicants must provide tax returns from the previous year along with bank statements that show a consistent flow of funds to the borrower’s business and personal accounts.
Applicants may also be able to secure personal loans for the self employed through government programs. For instance, if a consumer is receiving court-ordered child support payments or other benefits that are based on a set formula, the income can be used as proof of employment for a loan.
Even though it can be difficult to find personal loans for the self employed, these lending options do exist. And by understanding the different funding options available, consumers can better prepare to seek out these types of loans.
Lines of Credit
The freedom that comes with being self employed often means you have more flexibility to spend your money. But without a steady paystub, it can be challenging to meet the qualifications for loans and lines of credit that require verifiable income and a strong credit profile.
Depending on the nature of your business and the size of your bank accounts, there are a number of lending options available for the self-employed. You can try a personal line of credit, home equity lines of credit (HELOCs) or a secured loan that requires collateral in the form of investments or savings accounts.
A personal line of credit allows you to draw funds on an as-needed basis and is typically unsecured, meaning you’ll pay interest only on what you use. Business lines of credit, which are usually tied to the assets in a company’s bank account, have higher limits than personal lines of credit and allow for the same kind of access.
To qualify for a personal line of credit, you may need to provide two years of tax returns including Schedule C and tax transcripts from the IRS, as well as bank and financial statements. You can also research lenders that specialize in offering unsecured personal loans for the self-employed, such as Upgrade or SoFi, which will look at your education, credit history and monthly income against expenses to make an approval decision.
Secured Loans
Whether you need cash to invest in your business or tackle debt, not having a traditional job shouldn’t prevent you from getting finance. You can still qualify for personal loans, credit cards and other funding options — though the requirements might be slightly more stringent than for employed individuals.
The first step in the process is assessing your business and personal finances. Consider factors such as your revenue, debts and operating costs to get a clear picture of how much you can afford to borrow. You should also rework your budget to ensure that you can keep up with the monthly repayments and avoid falling into a trap of paying off debt for longer than you need to.
If you have assets that can be used as collateral, secured loans are an option for self-employed people who struggle to meet the requirements for unsecured personal loans. Secured loans usually come with lower interest rates as they pose less risk to lenders and can allow borrowers with poor credit to borrow more.
Upgrade is one lender that offers personal loans for the self-employed to help them fund a variety of purposes, such as home improvements and debt consolidation. To qualify, you’ll need two years of tax returns including Schedule C, income verification and bank statements. You can also use a co-signer to boost your chances of approval.