How to Get a Small Business Loan if You Are Self Employed

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The world of lending is daunting enough to start with, but once you’re unemployed it can be confusing how to support your business financially when you aren’t really a business. Fortunately, there are lots of options available out there for self-employed people and independent contractors and sole proprietors to get the funding they need to grow and expand their businesses.

Self-employment is an odd concept, somewhere in between being a business and an individual. You’re considered an individual for tax purposes, but you can take advantage of business deductions and credits. You are also usually subject to higher tax rates as both business owner and employee, so it can be confusing to know whether to seek funding as an individual or a business. Most financial institutions and other lenders treat business funding for self-employed people and independent contractors as small business loans instead of individual borrowers.

What Is Considered Self-Employment in the U.S.?

What qualifies as self-employment in the US is often confusing to people. Self-Employed people work for themselves, as opposed to being employed or contracted by an employer. Being self-employed doesn’t necessarily mean that you actually have incorporated as a business, and today many gig workers and freelancers are self-employed but report gains on their personal tax return rather than as a business entity.

Often the distinction between self-employed and an independent contractor is hard for people to determine. Independent contractors are, just like the name implies, under contract. These individuals will fill out form 1099 for taxes with their employer just like regular wage employees will fill out form W-4, but like self-employed people, contractors will also be responsible for reporting their own wages and paying their portion of self-employment income tax.

Self-employed people fill out no such tax forms with an employer. As a self-employed person, you take considerably more tax liability than you otherwise would because you are responsible for the portion of taxes that an employer would normally pay. The tradeoff for this is often that financial institutions and the government treat you as a small business, enabling you to claim valuable tax breaks like business expenses, as well as access powerful financial assistance and loans through a variety of programs.

Types of Loans for Self-Employed or Independent Contractors

Purchase order financing

Purchase order financing is a popular way of making bottom lines for buying supplies for customer orders. Primarily used by individuals involved in e-commerce, purchase order financing isn’t technically a loan. Rather than a traditional loan where you pay back a lump sum on an installment schedule, with purchase order financing, the financial institution pays for what you need from a supplier to fill customer orders. Your customers then send their payment directly to the lender and send you the remainder.

This can be a great way to get the money you need to continue doing business quickly, while also not having to worry about long repayment plans. Particularly for people involved in e-commerce or drop shipping, this method can be easily employed to get the funding you need for your business to thrive without altering your merchant process, or taking out a traditional loan.

Factoring

Factoring loans have become a popular opinion for both self-employed individuals and independent contractors in recent years. Factoring loans actually take advantage of one of the most annoying aspects of life as a small business owner– outstanding customer invoices. With a factoring loan, you use the money owed to you by customers through outstanding invoices as collateral to get quick working capital from a lender.

This can be convenient for a few reasons. First, there’s no debt to repay usually. With factoring, you can just choose to keep the advance payment for your customers’ unpaid debt and your unpaid invoices are the lender’s problem now. Waiting on customers to pay invoices to get the working capital you need puts your livelihood in the hands of another person, and factoring loans can give you that power back. Factoring loans also won’t require as much research as loans that use a credit profile or more complicated asset, like real estate, to guarantee repayment of a loan. This can make approval for factoring loans much quicker than other types of financing.

Accion

Accion is a non-profit micro and small business lending network founded in 1961 with the mission to “build a financially inclusive world with access to economic opportunity for all.” Accion offers many services, such as financial advising and venture capital investments, but their largest venture is by far Accion small business loans.

SBA Microloans

SBA microloans are administered by the US Small Business Administration. These loans are often available at discounted interest rates and can be repaid in terms of up to six years.

PPP Loans

The Paycheck Protection Program was another SBA administered program, specifically designed to help businesses support employee payroll expenses during the Covid-19 pandemic. The PPP loan amounts can help you cover average monthly payroll costs, and the PPP applications are completed through lenders approved by the SBA. However, the program and all PPP loan applications ended in May 2021, but any independent contractor or self-employed worker who had existing PPP loans may qualify for PPP loan forgiveness that covered payroll costs, or their second draw on their loan. For those still struggling with the pandemic’s effect on their business, the SBA still offers many programs for financial relief from Covid-19 related issues.

Eligibility Requirements

Different types of small-business loans have different eligibility requirements, but there are many options to fit people with a wide range of financial situations.

  • Purchase Order Financing. Unlike loans and other financing options, purchase order financing doesn’t typically have rigid requirements for minimum credit, assets, or income flow. It only requires that you both have a supplier that can deliver goods to a customer who has agreed to pay a price that satisfies the loan amount.
  • Factoring. Like purchase order financing, factoring loans can be very easy to obtain, even with average or poor credit. Factoring places your unpaid customer invoices up as collateral, so lenders have no risk so the requirements are much easier to meet.
  • Accion. Qualifying for Accion’s loans can be significantly easier than traditional loans. Accion requires that an applicant have a credit score of over 525, have the necessary cash flow to make monthly payments, and not have declared bankruptcy in the past year.
  • SBA Microloans. The program is available to small businesses and non-profit childcare providers. The requirements for credit history, collateral, and ability to repay the loan of these microloans are similar to but much less stringent than traditional loans.

How Much Can You Expect to Borrow

Lenders love to invest in the livelihood of businesses, so no matter how much capital you need to improve your workflow there’s likely an option out there that suits your needs.

  • Purchase Order Financing. This loan is usually for the cost of goods on one purchase order, and so is limited to one bulk transaction of physical goods.
  • Factoring. There really is no upper limit to how much your unpaid invoices are worth. The higher the value of your collateral, the more funding you’ll be able to receive through factoring.
  • Accion. Accion offers loans of up to $1 million to US small businesses. To date, they have approved more than 60,000 of these loans for independent contractors, small businesses, and self-employed business loans.
  • SBA Microloans. The SBA microloan program facilitates loans of up to$50,000 for startup and expansion.

How to Apply for a Loan if You Are Self-Employed

Depending on what kind of financing you decide is best for you, there are several ways you could go about seeking funding.

The Small Business Administration (SBA)

The SBA offers many types of loans beyond just their Microloan Program. To apply for any lending program offered by the SBA, you’ll need to find a local lender that is part of their network. The SBA subsidizes these lenders throughout the country so that anybody can access loans at a competitive rate for their small business.

Traditional Banks

Not all banks will offer small business loans, but once you find one that does, you’ll want to inquire with them about a meeting with a loan officer. The bank will likely want you to business income reports, tax returns, and asset valuations ready, along with personal credit information.

Alternative Lenders

Alternative lenders are private organizations that are able to offer financing to businesses, just like the credit department of banks. Usually, these lenders will have applications available on their websites. As financing is their only goal, typically these applications move much more quickly than traditional bank loans.

First Down Funding | Alternative Lending

Alternative lenders aren’t plagued by the bloated bureaucracy that large financial institutions are subject to, so often they can be far more flexible on rates, have less strict eligibility requirements, and fewer guidelines on how you use your funding. Private lenders like First Down Funding are typically are able to get you the funds you need within 72 hours.

Alternative lending has developed alongside the changing workforce of our country and is often one of the best ways for self-employed workers to get the funding they need to grow and expand their businesses. First Down Funding has a long history of partnering with contractors and self-employed workers to get them the financing they need to be successful.

FAQ About Loans for Self-Employed

Are there any loans for the self-employed?

Most lenders out there have options for self-employed people. As a self-employed worker, you are considered a small business for financial purchases by the government and most institutions. Instead of year-end company income statements, you have your personal tax return.

Can the self-employed get an SBA loan?

Yes. The SBA offers loans to self-employed individuals and independent contractors just like it does other small businesses.

How do SBA loans work for the self-employed?

Instead of using your payroll and business income to determine your loan eligibility, your lender will use your gross income. Otherwise, there are few differences in the process that contractors or self-employed people should encounter.

Can a self-employed person apply for a PPP loan?

Unfortunately, the PPP program ended on May 31, 2021. Any self-employed person or independent contractor who had an existing loan may still be eligible for their second draw, or to apply for the PPP Loan Forgiveness Program.

Can you start a business with a PPP loan?

No. The PPP was designed to back payroll expenses for businesses founded before February 15, 2020.

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