If you’re self-employed and short on cash, you may be eligible for borrowing options including personal loans. Personal loans provide a set amount of money that you repay over a fixed time frame, and they can be helpful for borrowers looking to consolidate debt or cover a large or emergency expense.
Before you look for a loan, you should know what to expect as a self-employed applicant. It’s also important to consider all of your options to make sure a personal loan is the right choice – it may not be.
“You shouldn’t be looking for a personal loan if you’re self-employed and it’s for the business,” says Lori Atwood, a certified financial planner and the founder of Atwood Financial Planning and Fearless Finance. “If it’s for you, just make sure that you have all the right proof of your cash flows.”
Is It Harder to Get a Personal Loan if You’re Self-Employed?
Every loan applicant is different regardless of employment status, and getting a loan won’t necessarily be more difficult for self-employed applicants.
“Regardless of whether you’re self-employed or salaried, it’s always going to be a balancing act going through the underwriting process,” says Brian Walsh, CFP and senior manager of financial planning at SoFi. For instance, borrowers with a high income relative to their debt payments may not need as strong a credit score, Walsh says.
If you are new to self-employment, however, you won’t be able to easily prove that your income is consistent. This can make it more difficult to get a loan.
“They may also be able to still qualify because lenders will consider their credit score, their education, their free cash flow, maybe their financial and their payment history, stuff like that,” Walsh says. “But it’s still going to make it more challenging if they’ve only been doing this for, let’s say, a year.”
Adding a co-signer can make it possible to get a loan if you haven’t been in business for long. “That co-signer would either have to be independently wealthy, which for young people sometimes they have a parent or a grandparent who can do that,” Atwood says, “or if it’s a spouse or a friend. That person has to have a W-2 employment where they know there’s dough coming in.”
How Can You Prove Your Income When You’re Self-Employed?
Although self-employed borrowers can’t provide all of the same documents as other workers, they should still be able to supply satisfactory proof of income when applying for a personal loan.
“Any time a self-employed person goes through the loan process, they should expect to provide additional documentation that myself as a W-2 employee would not provide,” Walsh says. “That could be documentation related to your income such as the last couple years of tax returns. It can even be documentation like financial statements or bank statements that show the inflows actually coming in on a consistent recurring basis.”
Again, it can be more challenging to get a loan if you’re new to self-employment – ??you may not have tax returns that reflect revenue and expenses or bank statements that show a consistent cash flow. But if you’re working in a similar industry, it may be easier to make your case.
For example, an experienced plumber who recently became self-employed as a plumber would have a more predictable income than an experienced plumber who decides to run a restaurant, says Ryan Olson, vice president of consumer lending at Community First Credit Union in Florida. “We’re looking at previous employment as well. Are they similar or like industries, and have they stayed in those like industries, kind of migrating to that new level of self-employment?”
Should You Take Out a Personal Loan When You’re Self-Employed?
Personal loans can be a helpful tool for borrowers looking to consolidate higher-interest debt. They’re also typically unsecured, which means you won’t have to pledge collateral like a car or house to get funding.
If you’ve already gone into personal credit card debt to fund your business, then getting a personal loan with a lower interest rate could make sense. “But if somebody came to me clean slate with a business idea, they should not be looking for personal loans, and they should not be funding it personally,” Atwood says.
Debt can also make it more challenging for self-employed individuals to manage their cash flow. “Probably the biggest challenge I’d see working with self-employed individuals is managing the cash flow,” Walsh says. “And a lot of times when they’re managing cash flow keeping debt in as much control as possible ends up being pretty critical.”
Before taking out a personal loan, make sure you really need the money. “Unless you absolutely need it, then you probably shouldn’t be borrowing money for it,” Walsh says.
Keep in mind that you’ll want a strong credit score to get a low interest rate on a personal loan. You can also consider different types of lenders, including online lenders and peer-to-peer lenders. Prequalifying with multiple lenders can help you find the best option.
What Are Other Ways to Get Funding When You’re Self-Employed?
Personal loans can be useful to some consumers, but they aren’t always the right choice. Depending on your financial situation and what you plan to do with the loan funds, you might also consider options including:
- Business loans. If you are looking to fund your business, you can consider small-business loans. Options include term loans and equipment loans.
- Equity financing. If you are starting a company that won’t have cash flow for years, or potentially at all, Atwood recommends thinking about selling some equity. In this scenario, you are selling part of the ownership of your company.
- Home equity loans or cash-out refinances. If you own a home and have equity, you can use one of these tools to get access to cash. Tapping into home equity is an especially appealing option with the low interest rates that are currently available, Walsh says.
- 0% APR credit cards, If you are considering a personal loan to consolidate credit card debt, you can also look into 0% annual percentage rate credit cards, which generally charge no interest on balances for between 12 and 21 months. You can transfer existing balances to the card, but be sure to plan on paying off your debt before the introductory period ends. Otherwise, your debt will start accruing interest again.
- Secured personal loans. Personal loans are typically unsecured, but lenders also offer secured options. In this case, borrowers put up collateral, such as a car or boat, which they could lose if they default on the loan. In exchange, borrowers can get lower rates. “Your unsecured loans have higher rates … than your typical secured loans, all depending on credit, obviously,” Olson says.
Overall, you should think about what you want to use best cash advance Colorado the money for when deciding whether to pursue a personal loan. “I can’t stress enough that the person needs to match the funding with the thing that they’re trying to fund,” Atwood says.