Personal Loan Options for the Self-Employed

Self-employed workers can face certain challenges when trying to secure funding for their personal enterprises. Inconsistent income or lack of a steady paycheck that a W-2 salary offers can make lenders more reluctant to provide funds. This, in turn, can lead lenders to require a greater amount of documentation to determine whether sole proprietors or self-employed workers can make their payments.

However, just because you’re self-employed doesn’t mean that getting a personal or business loan is impossible—you just need to know where to look. From government programs to specific banks or online marketplaces, you still have several options to explore beyond traditional lenders. We’ll take a look at some of these below.

Key Takeaways
Self-employed workers can find financing via personal loans through online lenders, business loans, lines of credit, and credit cards.
Most lenders will require a fair to excellent personal credit score along with bank statements and multiple years of tax returns to verify income.
Sole proprietors with newly established businesses or those rebuilding credit may want to consider a co-signer for loans.
SBA microloans can also be a viable option for self-employed workers and range from $500 to $50,000.
Why Getting a Loan May Be Trickier
It’s no secret that self-employed individuals may encounter more obstacles when trying to obtain a loan. Lenders can be warier because salaried employees showcase more stability with income.

In lieu of pay stubs, self-employed workers may be asked for a few other documents to prove their income. For example, some lenders will want to see at least two months’ worth of bank statements to look at your credit and debit charges and make sure you have enough funds to cover payments each month.1

Other verification documents may include your individual tax return and/or IRS forms Schedule C and Schedule SE. In some cases, multiple years may even be requested. Lenders want to make sure that you not only currently have the income, but that your business is well-established enough to maintain the potential loan agreement long term.

Some lenders such as fintech-focused company Upgrade won’t consider your income in their application decision if you haven’t been in business for a year or more. This means that you may need to have a stronger showing in areas such as personal credit score—otherwise, the best route could be having a co-signer.2

Personal Loan Options for the Self-Employed
When it comes to funding, even those on a company’s payroll can have difficulty getting personal loans. However, these loans are attractive because they can be used for just about everything—unexpected expenses, emergencies, medical bills, debt consolidation, and home repairs, to name a few. Here are some personal loan options.

Online Lenders
Some of the best personal loan lenders, particularly those that are based online, tend to work with those who are self-employed, meaning it shouldn’t be too difficult to find a company you can trust. However, you’ll still want to make sure to apply for a loan that sets you up with the best chance of getting approved, such as a loan that fits your credit score.

Examples of online lenders that might be good matches, depending on your credit and other criteria, include:

LightStream: For those with good to excellent credit (660+ score)
SoFi: Good credit score, bank statement and/or tax returns required
Upstart: Credit score of 300+, only personal income (self-employed, other wages) considered
Upgrade: Fair to good credit score, two years of individual tax returns
Credit Cards
Credit cards are typically easier to qualify for than personal loans since you are receiving a line of credit versus a lump sum of cash. Major credit cards can grant you additional benefits, such as travel perks, exclusive offers, and discounts. Application requirements are straightforward; the bank will verify your annual net income, credit score, and debt-to-income ratio.

Payday Loans
Payday loans are designed to help borrowers in emergency situations but are not meant to be long-term financial solutions. These loans generally need to be repaid during your next pay cycle and typically cover smaller amounts between $100-$500 with limits varying by state.

Payday loans can come with an exorbitant annual percentage rate (APR) as a result of high finance charges. This means you may pay a rate near 400% versus the average credit card APR of 12% to 30% for most credit cards.3

Before considering payday loans, you may want to look at other loan options such as friends and family if the need is urgent. You may also want to make certain lifestyle changes in the process.
Co-signed Loans
Having a co-signer can be valuable when you are having difficulty qualifying for a personal loan. If you have just started building credit or are in the process of rebuilding it, a highly qualified co-signer may help you secure a better rate. You can typically add a co-signer such as a parent to your personal loan or credit card application, and financial institutions will verify their income and credit score, as well.

Your co-signer is also agreeing to take on your debt should you be unable to pay back the loan, and there are other consequences outlined in what is called a Notice to Co-signer.

Business Loans for the Self-Employed
If you’re a sole proprietor looking for a business loan, you have quite a few options. While your local SBA office offers loan options tailored to sole proprietors and small businesses, you can still secure funding from online lenders and other sources.

SBA Microloans
The Small Business Administration (SBA) may be one of the most ideal options for sole proprietors, self-employed workers, and independent contractors to start their business loan search.

“When people reach out to us, we usually send them out to a resource partner to get ready for financing,” said SBA lender relations specialist Frank A. Anderson in an email to The Balance. “And that resource partner or organization can help them put a business plan together and get their financials together to present to a lender to apply for a loan.”

While the SBA’s most common loan program is the 7(a), others can benefit self-employed workers in particular, including SBA microloans. These loans range in amounts from $500 to $50,000 and can be used as working capital. Another benefit of these loans is that lenders can accept credit scores in the high 500s.45

Business Credit Cards and Lines of Credit
Business credit cards work like personal credit cards but are tied to business bank accounts and should only be used for business expenses. With a business credit card, you might get cash back on purchases like office supplies, internet or cable services, and gas.

A business line of credit, meanwhile, is a loan that allows you to borrow up to a certain limit and then pay interest on that amount.

A line of credit is more flexible than a business loan because you can borrow what you need as long as you don’t go over your limit.

Jonathan Kelly, a New York Life insurance specialist, told The Balance via email that many small-business owners may prefer the latter. “Someone self-employed would want to use the line of credit more because it’s usually more money and you can do more with it,” he said.
How To Apply
When deciding to apply for a personal or business loan, the best step you can take is to be prepared. In general, you’ll need any of the following to apply as a self-employed worker:

Federal tax returns for the last two years
A Schedule C or Schedule SE form
Bank statements
You will also want to assess your credit score beforehand. Knowing your score in advance can also help you decide if you should go into the loan application process with a co-signer to help your approval odds and potentially improve your terms.

“The best tip I have for anyone is to have your documentation in order upfront,” said Anderson. “If all things are together and presented [in a] timely [manner], it can reduce the time for loans to be processed.”

Frequently Asked Questions (FAQs)
How do I calculate my self-employment income for a loan?
Sole proprietors filing a Schedule C will calculate their qualifying self-employment income by:

Combining Lines 12, 13, 30, and 31.
Repeating this process for the prior year’s income.
Averaging the incomes—if your two years’ prior income is less than your previous year. If your two years’ prior income calculation is greater, use your previous year’s income to apply for your loan.
What documents do you need to provide for a loan when self-employed?
The documents you need to provide for a loan when self-employed include:

Bills or other forms that verify personal contact information and Social Security number
Pay stubs (if applicable)
Bank statements
Federal tax returns including Schedule C, Schedule SE, and 1099s if you have additional income that you want to be considered

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