How to get a small business loan when self employed

When you’re self-employed, bringing in revenue to cover operating expenses or support plans for growth is a priority. Whether you’re a freelancer, sole proprietor or independent contractor, the time may come when you need outside financing to help cover your costs.

A self-employed business loan can give you the capital needed to cover short- and long-term business goals. You can use it for working capital expenses or any other business-related need, such as investing in marketing, equipment or other products and services that will help you expand.

Let’s dive into the types of self-employment loans available and strategies that will help you get approved.

Compare loans for self-employed business owners

There isn’t one perfect self-employment business loan for all sole proprietors. Instead, different business loans and lenders work well in different situations. Here’s a rundown of loan types and lenders for you to compare:

Types of loans for self-employed business owners

Freelancers and self-employed business owners can get most of the same business loans as other businesses, though your needs will be different. You can choose the type of loan that best matches your purpose for funding.

Bank loans: Best for low rates

Banks tend to offer the lowest interest rates compared to other lenders, helping you save money in borrowing costs in the long run. But banks may consider your self-employed business more risky than other businesses, especially if you haven’t built up total revenue or steady or diverse streams of income. If you don’t have a credit score of 670 or higher and at least one to two years’ time in business, you may need to look at other types of lenders.

Online business loans: Best for accessibility

Online business loans often use alternative data when they’re reviewing a business’s credit. For example, lenders may look at personal bank statements and bill payments that aren’t reflected in your personal or business credit score. Using alternative data helps online lenders approve startups or freelancers that don’t meet the guidelines for a traditional bank business loan.

Online lenders also tend to have less-strict lending requirements. Many take startups with at least six months in business and personal credit scores in the low 600s. A few lenders will drop credit score requirements even lower and offer loans with no set time in business requirement or credit scores as low as 450.

Business lines of credit: Best for flexible spending

Business lines of credit blend the features of a credit card and a business loan, setting a loan limit that you can borrow from at any time. Most business lines of credit from online lenders offer short repayment terms, usually between six and 24 months. But the short terms and ability to reuse the credit make it helpful to cover short-term expenses as they arise.

About 57 percent of startup nonemployer businesses and 68 percent of established businesses need financing to help them pay operating expenses, according to the 2022 Small Business Credit Survey by the Federal Reserve Banks. Business lines of credit offer the flexibility needed to cover these day-to-day expenses.

Since you’re already approved for the credit line, you won’t have to wait for the loan to be approved before you can receive and spend funds. If you have strong credit, they tend to offer interest rates as low as bank term loans. For example, lenders may offer interest rates for lines of credit starting at 8 percent.

SBA loans: Best for repayment terms

SBA loans are business loans that are partially guaranteed by the Small Business Administration. Because SBA loans offer repayment terms of up to 25 years, self-employed borrowers can stretch out payments over a long time. This lowers the monthly amount, freeing up capital to use in other areas of the business. SBA loans also cap interest rates to a lower rate than many business loans.

But many lenders have tight requirements to get an SBA loan. For example, for SBA 7(a) and 504 loans, some lenders require personal credit scores of 650 or higher, at least two years in business and annual revenue of around $200,000.

If you don’t meet a traditional lender’s guidelines, you could look for a self-employment loan through a community development financial institution (CDFI) or Community Advantage lender. These lenders focus on serving underrepresented communities, lowering requirements for eligibility. They offer 7(a) loans, the SBA’s most popular loan program, but only for loans up to $350,000.

Microloans: Best for underserved communities

Microloans are business loans with smaller maximum loan sizes than you’d find with a standard business loan. While there’s no standard for what qualifies as a microloan, microlenders may cap these loans around $100,000 or lower. For example, an SBA microloan goes up to $50,000.

Microlenders also tend to serve underrepresented business owners, such as minority business owners, veterans, women or people in low-income areas. According to an SBA press release in fiscal year 2023, the SBA approved microloans for 5,500 small businesses. Of those, 35 percent went to Black-owned businesses, and 15 percent went to Latino-owned businesses.

Business credit cards: Best for short-term lending

Business credit cards work well if you’re looking to cover expenses that can be paid off quickly. As long as you pay off the card in full each month, you won’t pay any interest on the purchases you made.

The best business credit cards also let you earn perks and rewards. Many cards give you 1 percent to 5 percent cash back from purchases, while others let you earn points you can redeem for travel.

As a freelancer, independent contractor or sole proprietor, every dollar counts — and you won’t get the chance at zero interest with standard business loans. Business credit cards also welcome unincorporated businesses, not requiring you to be an LLC or corporation to apply.

Personal loans: Best for new businesses

A personal loan is a loan borrowed under your personal name rather than your business. Personal loans work well for startups that don’t have the credit history to qualify for a traditional business loan.

And while it’s possible to get a self-employed business loan without forming a legal business, personal loans won’t require you to show business formation documents.

However, some personal loans will include restrictions on how the funds are used and may restrict the funds from being used for business purposes. You’ll need to read your loan agreement carefully to make sure you’re using the loan in accordance with the contract. 

Additionally, if you get an unsecured personal loan, you won’t have to back the loan with personal assets. Many business loans require you to sign a personal guarantee, which allows the lender to go after your personal assets if you can’t repay the loan. 

Merchant cash advance: Best for emergencies

Merchant cash advances have high approval rates, making them an attractive option if you don’t qualify for other business loans. MCA lenders approve you based on your past sales revenue, typically for businesses taking credit or debit card sales.

Because MCA lenders rely on your sales history, they tend to approve even businesses with bad credit, such as a personal credit score of 550. Many MCAs also approve and deposit funds quickly, in as little as 24 to 48 hours in some cases.

But you usually pay an MCA daily or weekly, which could strain your business budget until the debt is repaid. MCAs also come with high fees that convert into interest rates of 50 percent to 100 percent or more.

Because you’re bound to get approved but are charged high fees, merchant cash advances are best used as a last resort when you need funds to cover emergency expenses.

How to get a business loan when you’re self-employed

Getting a business loan for freelancers may be challenging. But these strategies will help you get approved:

• Prove steady revenue. Your level of revenue will play a role in getting approved and for how much. Most lenders are looking for at least $100,000 in annual revenue, but some lenders take less.
• Go with a freelancer-friendly lender. To boost your odds of approval, go with a lender that specializes in helping freelancers. You have a better chance at finding these with online lenders.
• Compare offers. You can prequalify with multiple lenders to compare loan amounts, terms and interest rates. A prequalification lets you see what you qualify for without a hard credit pull that would normally cause your score to dip slightly.
• Offer collateral. Since backing the loan with assets guarantees that you can repay, lenders look more favorably on a loan application secured by collateral.

Documents needed to prove you’re self-employed

As a freelancer or self-employed business owner, you may not have all the same documents as an employer-based business. To show that you do get revenue from self-employment, you’ll need:

• Personal bank statements
• Business bank statements, if separate
• Tax forms with Schedule C or SE included
• 1099 forms
• Business financial statements, such as a balance sheet or reports from accounting software
• LLC formation documents, if necessary

Bottom line

When you’re self-employed, your main challenge is growing revenue to serve more customers and often with less capital than other businesses. Getting a business loan can give you the boost you need as long as you meet the lender’s requirements.

Frequently asked questions

• How long do you have to be self-employed to get a loan?

  Many lenders require at least two years in business to get a self-employed business loan, giving you ample time to build revenue. But it’s possible to get a loan in a year or less as long as the lender accepts startup businesses.

• Can I get a business loan if I’m self-employed?

  Yes, lenders will offer business loans to those self-employed as freelancers or LLCs. You have to meet eligibility requirements to qualify. But you can improve your chances of approval by going with a lender that welcomes self-employed business owners.

• What income do lenders look at for self-employed?

  Lenders consider all income that you get from your self-employed business. They can verify this income through your personal bank statements and tax returns.

• Are independent contractors eligible for SBA loans?

  Yes, independent contractors are eligible for SBA loans. Under the SBA’s definition, small businesses qualify as long as they don’t exceed a specific revenue limit or number of employees. The limit varies by industry anywhere from 100 to 1,250.