Getting Loans When Self-Employed With Bad Credit: A Complete Guide

Being self-employed can have many advantages – the freedom to be your own boss, choose your own hours, work on projects you enjoy. However it also comes with unique financial challenges especially when your credit score is not so great. As any self-employed person knows, income tends to fluctuate more when you work for yourself. This can make it harder to qualify for loans from traditional lenders that rely heavily on credit scores and consistent income sources.

The good news is there are more lending options now for self-employed people with bad credit. While you may not qualify for the very best rates it is possible to get approved if you do your homework. Here is a complete guide to getting loans when self-employed with bad credit.

Why Getting Loans Can Be Harder When Self-Employed

When you apply for any type of loan, lenders want to see that you have the means to repay it. For traditional lenders like banks and credit unions, this usually means looking at three key criteria:

• Credit score – Most lenders have a minimum credit score threshold you need to meet to qualify for a loan. The higher your score, the lower interest rate you can typically get.

• Income – Lenders look at your income sources and how stable they are over time. Traditional employers like W-2 jobs make this easy to document and predict. Self-employment income that fluctuates is seen as riskier.

• Employment history – Length of time at your job or in your current business is also weighed by lenders. Shorter histories are seen as less stable and more prone to change.

When you are self-employed, it can be tricky meeting requirements in all three areas above, especially if you also have bad credit. But the lending landscape is changing, and more options are emerging all the time.

Types of Loans for Self-Employed Borrowers

Here are some of the most common loans that self-employed people seek out:

Personal Loans

These fixed-rate, installment loans can be used for almost any purpose, from debt consolidation to home renovations and more. Amounts range from $1,000 to $100,000 usually, with terms from 1 to 7 years typically.

The application process is simple, with online lenders offering pre-qualification to check rates. Approval decisions are quick as well, often just 1-3 business days.

Business Loans

From short-term working capital loans to longer term expansion financing, small business loans can be a lifeline for the self-employed. Loan amounts span from a few thousand to several hundred thousand dollars.

SBA loans geared to very small businesses also provide favorable rates and terms. The SBA guarantees portions of these loans, so approvals are easier to secure.

Credit Cards

Business and personal credit cards allow self-employed individuals to earn rewards on purchases, separate business/personal expenses, and get quick access to revolving credit.

Cards aimed at fair credit applicants make approvals achievable even with less-than-perfect scores. Initial limits may be low but can increase over time with responsible usage.

Auto Loans

Bad credit doesn’t have to mean buying a junker car with cash. Specialty lenders provide auto financing for borrowers with scores as low as 500 using stipulations like higher down payments, shorter terms, or higher rates.

Direct lender pre-approvals take the guesswork out of shopping and let you focus your search on cars that fit your budget and needs.

Tips for Securing Loan Approval

Getting approved for financing when self-employed with bad credit takes a bit more effort, but these tips can help your chances:

Have 2 Years of Self-Employment History

Lenders like to see a track record of success managing your own business. Shoot for at least 2 years if possible before applying for a sizable loan. This can help offset a poor credit score or fluctuating income.

Improve Your Credit Score

In the months leading up to a loan application, pay down balances and dispute any errors to help improve your credit profile. Even marginal gains can mean better rates and terms.

Gather IncomeDocumentation

Tax returns, 1099s, bank statements, and profit & loss statements provide proof of earnings. Have them ready to send to lenders that require income verification.

Consider a Co-signer

Adding a cosigner with better credit may help you qualify or get a lower rate on a loan. Choose someone you trust who can take over payments if you’re ever unable to make them.

Use Collateral

Putting up an asset like a vehicle or savings account can secure approval for loans like personal loans or auto financing. The lender can seize collateral if payments stop.

Only Borrow What You Need

It can be tempting to max out new credit as soon as you qualify, but avoid this impulse. Start small to demonstrate responsible usage and build trust with lenders.

Top Loan Options for Self-Employed Borrowers

If your credit score is under 700 and you need financing, here are some top picks to consider:

Upgrade Personal Loans

Upgrade offers unsecured personal loans up to $50,000 for borrowers with credit scores starting at 580. Joint applications are also permitted to help improve approval odds.

LendingClub Personal Loans

Available in all 50 states, LendingClub personal loans have no prepayment penalties and can help consolidate high-rate credit card balances. No cosigner release option however.

Lightstream Personal Loans

These personal loans from Lightstream require no income documentation for approval. Loan amounts span from $5,000 to $100,000 with fixed rates as low as 7.99% APR.

Nav Auto Loans

Specializing in bad credit borrowers, Nav can pre-approve auto loans for people with credit scores as low as 500. Down payments as low as $0 and terms up to 72 months available.

Kabbage Business Loans

Providing lines of credit up to $250,000, Kabbage approvals often rely more heavily on business than personal credit. Funding can be secured as soon as the next day in some cases.

PayPal Working Capital Loans

Easy applications and fast funding make these PayPal business loans helpful for short-term needs and emergencies. Payments adjust based on your sales.

Alternatives to Explore If Loan Approved Denied

If you apply for a loan but get denied as a self-employed borrower with bad credit, all is not lost. Here are a few other options worth considering:

• Ask family or friends for a personal loan – A signed agreement can make this official.
• Use credit cards or tap available limits – High-rate but fast access to smaller amounts potentially.
• Line up accounts receivable financing – Get funding based on unpaid invoices owed.
• Delay plans until you can save up – Old fashioned but often wise. Lets you avoid costly financing.
• Seek out a business partner – Their credentials can complement yours and improve chances.
• Work on improving your credit – In 6-12 months you may qualify for better loan terms.
• Contact your local Economic Development Corporation – They may know of special loan programs and incentives.
• Continue the hunt – Cast a wide net online and try contacting multiple lenders to find one able to approve you.

The most important thing is not to let rejection discourage you from the search. Being thorough and persistent can eventually lead you to affordable financing, even with self-employment and poor credit scores in the equation.

Final Tips on Getting Loans When Self-Employed

• Check loan eligibility frequently – Improving credit can expand options
• Watch out for predatory lenders – Avoid excess fees or unusually high rates
• Read the fine print – Know the true costs, drawbacks and risks before signing
• Build reserves – Self-employment income can fluctuate, so emergency savings helps
• Make payments on time – Helps credit and ensures accessible credit going forward

The path to loan approval may take a bit more work when you are self-employed and have bad credit. But being informed, patient, and persistent makes success possible. Follow the guidance above, and access to affordable financing is within your reach.