How to Get a Loan When Self-Employed

As a self-employed individual getting approved for a loan can seem daunting. Traditional lenders like banks often want to see W-2s, pay stubs, and extensive credit history – documents you likely don’t have as someone who works for yourself. But there are plenty of options for financing available to the self-employed if you know where to look.

Overcoming Lending Barriers

Lenders need to verify your ability to repay the loan. When you’re self-employed, they can’t just look at a pay stub to confirm your income. Instead, you’ll need to provide documentation like tax returns, 1099s, and bank statements.

Even if you’ve been self-employed for years and have steady earnings, lenders may be skeptical because your income isn’t guaranteed like a regular paycheck. You may also show low taxable income after business expenses and deductions.

Having less-than-perfect credit can also make getting approved tougher But don’t get discouraged! Here are some tips to strengthen your loan application

• Have all required documents ready – Tax returns, 1099s, bank statements proving your income sources. The more documentation you can provide, the better.

• Consider adding a cosigner – An applicant with better credit and income can improve your chances of approval and may help you secure a lower interest rate.

• Put up collateral – Banks feel more confident lending when the loan is secured by an asset like a car or investments.

• Seek out alternative lenders – Online lenders and credit unions may have more flexible lending requirements than traditional banks.

Types of Loans for the Self-Employed

Personal Loans

Personal loans allow you to borrow a lump sum and repay it in fixed monthly payments over 1-7 years. Lenders like LendingClub, Prosper, and Upgrade are online companies that may approve self-employed applicants with verified income and fair credit. Loan amounts range from $1,000 – $100,000.

Pros:

• Predictable monthly payments
• Fixed interest rates
• Can use funds for any purpose

Cons:

• May require collateral
• Higher rates than secured loans

Business Loans

Online lenders like Fundbox, Kabbage, and BlueVine specialize in loans for solopreneurs and small business owners. Instead of personal credit scores, they focus more on your business revenue and performance.

Pros:

• Qualify based on business instead of personal finances
• Fast approvals
• Lines of credit offer flexibility

Cons:

• Short repayment terms
• Must use funds for business purposes

SBA Loans

The Small Business Administration guarantees loans made by approved lenders to qualifying small businesses. Loan programs include the SBA 7(a) and SBA Express loans.

Pros:

• Low interest rates
• Long repayment terms
• Funds can be used for variety of business expenses

Cons:

• Extensive paperwork required
• Must meet SBA size standards

Home Equity Loans

These allow you to borrow against the equity in your home. The home serves as collateral, so lenders view home equity loans as less risky than other types of financing.

Pros:

• Competitive interest rates
• Can qualify for larger amounts than personal loans
• Deductible interest

Cons:

• Risk losing home if can’t repay
• Closing costs and fees

401(k) Business Financing

Some lenders like Guidant Financial allow you to leverage funds from a 401(k) or IRA to start or invest in a business without early withdrawal penalties. The loan is repaid via monthly contributions back into the retirement account.

Pros:

• Avoid taxes and penalties
• Competitive rates
• Use retirement funds without permanent depletion

Cons:

• Complex application process
• Must have sufficient savings to qualify

Where to Apply for Loans When Self-Employed

Here are some of the best options to consider when seeking financing:

• Online lenders – Companies like LendingClub, Prosper, Kabbage, and Credibly cater to self-employed borrowers. Quick approvals and funding.

• Credit unions – Membership eligibility required, but may have more flexible underwriting for self-employed members than big banks.

• SBA lenders – Banks and other lenders that have been approved to provide SBA-guaranteed small business loans.

• Peer-to-peer lenders – Sites like LendingClub and Prosper connect individual investors looking to fund loans with borrowers. May overlook credit flaws.

• 401(k) business financing lenders – Companies like Guidant Financial, American IRA, and Benetrends facilitate 401(k) business financing loans.

• Mortgage companies – Some mortgage lenders like loanDepot and Guaranteed Rate offer home equity loans and lines of credit.

• Buy now, pay later lenders – Companies like PayPal, Klarna, and Affirm provide installment loan options for business expenses. Quick approval with soft or no credit check.

Tips for Securing Financing

As a self-employed loan applicant, you can optimize your chances of getting approved with good preparation:

• Have all your income documentation organized and readily available. The more proof, the better.

• Get your business and personal credit reports and review for any errors that could impact your scores. Dispute inaccuracies.

• If possible, wait to apply until after you’ve filed tax returns reporting strong income.

• Reduce debt burden as much as possible and avoid new credit inquiries before applying.

• Consider adding a cosigner or putting up collateral if you have risk factors like short credit history or low income.

• Shop around with multiple lenders to compare loan options and choose the best rates and terms you can qualify for.

• If turned down, ask the lender for an explanation so you can address areas of concern before reapplying.

While getting a loan without traditional W-2 employee income can require some extra effort, having patience and persevering can help you access the financing you need to support your self-employment goals.