5 Tips for Getting a Loan When You’re an Independent Contractor

Getting a loan when you’re an independent contractor can be challenging. Many banks won’t even think about giving entrepreneurs loans until they’ve been in business for a couple of years.

However, you can apply and qualify for several small business (SB) loans provided you have proof of income, a high credit score, and offer up some collateral if you’re a relatively new startup.

Key Points

  • Independent contractors face challenges in securing loans, but can qualify for small business loans by providing proof of income, a high credit score, and collateral.
  • Lenders look for evidence of consistent business growth and revenue over several years to offer premium loan rates, and inconsistencies in income could result in higher interest rates.
  • A strong personal and business credit score is crucial for loan approval, with a score of 700 or higher offering the best interest rates; maintaining good financial planning and budgeting practices can help improve this score.
  • Established businesses of at least 2-3 years have access to more financing options, as lenders are generally skeptical of startups due to their high failure rate.
  • Multiple loan options are available for an independent contractor, including lines of credit and term loans, which offer flexibility in borrowing, but it’s also beneficial to consider getting a business credit card for better cash flow management.

The 5 Best Tips for Applying for a Loan if You’re Self-Employed

If you report self-employment income as an independent contractor or gig worker, you can be considered a small business owner. These tips will help the SB loan process go smoothly.

A chart depicting revenue growth

1. Prove Your Income by Providing Pay Stubs

Employees from a typical business can expect regular paychecks. These pay stubs make it easier to apply and qualify for mortgages and credit cards because you have proof of income.

However, when you’re self-employed, you don’t receive this documentation, but you can learn more here about how to create and use a pay stub to prove your business status.

Lenders may also ask you for a copy of your bank statements to back up your pay stubs or tax statements of the previous year to confirm that you’ve been receiving a consistent income from clients.

2. Give Evidence of Business Growth or Revenue

Although your proof of income can prove that your business is growing, it doesn’t provide enough evidence that your company is growing or earning enough consistent revenue. To get premium loan rates, you need to verify that you’ve had consistent growth over many years.

The amount of years you’ll need to get the best rates depends on the lender. For example, if you went from earning 40K one year, 80K the next year, and you’re now pulling in 120K, your lender will consider that a “consistent growth.”

However, if you flip flop often (40K to 30K to 60K to 120K to 70K), you’re less likely to get a great rate because you’re considered a bigger risk.

Examining the credit report of an independent contractor

3. Improve Your Credit Score

Lenders will often check the business owner’s personal credit, but they will always check your business’s credit score if you use a company credit card. A lender will often do a soft credit check, which doesn’t affect your credit, but a hard credit check is a possibility.

Always ask the lender what type of check they’re performing so you can inform your credit reporting agencies.

Lenders will consider a credit score of 650 or higher to be good, but 700 or higher will offer the best interest rates.

To improve your credit score, pay your bills on time, use your credit cards (pay them off before they incur interest), and aim for 30% credit utilisation or less. It is generally sensible to respond to the financial challenges faced by contractors with careful budgeting and good financial planning.

Ensuring that clients pay their invoices and maintaining good invoice management practises will also help your cashflow and demonstrate good financial management to a potential lender.

4. Try to Hold Out for 2-3 Years as an Independent Contractor

Many high-quality lenders will only provide financing options to businesses that are two to three years old. 50% of companies fail in the first five years, so many lenders will be skeptical of your new startup.

Although lenders do make exceptions, options for new businesses are more limited. To prove how long you’ve been in business, use your date of incorporation or your EIN.

An alarm clock and growing columns of money

5. Get a Line of Credit or Term Loan

A line of credit allows you to borrow money from an approved amount and functions similarly to a credit card but typically has lower interest rates.

A term loan provides you with the exact amount of money you’ll need for a project, which can be helpful for businesses that have fluctuating revenues but operate all year or for companies that close down during a season.

These loans have a straightforward application process that doesn’t require a significant amount of proof or money cushion.

However, being self-employed won’t make it impossible for you to get invoice financing or a business cash advance; it just won’t be as easy to obtain.

If you don’t have one already, consider getting a business credit card. Not only are they convenient, but they offer a line of credit that can be useful to you if cash flow is tight.

Many low-interest business cards are available for new businesses, but they will use your personal credit score to determine eligibility. If you’re using a personal credit card in the meantime, transfer your business payments to that new card once you’re approved.

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