financing for self-employed

Best Alternative Financing for Self-Employed Professionals

Ezra Cabrera | October 29, 2021


    Key Takeaways

    • Self-employed professionals may apply for financing to get more customers, upgrade their equipment, or refinance their loans.
    • While it may be harder for self-employed individuals to get a small business loan with the nature of their income, there are a lot of financing solutions they can opt for.
    • Self-employed individuals may use microloans, cash advances, term loans, and other alternative financing to fund their needs.
    • Some alternative financing solutions may require collateral. This reduces the lender’s risk in case the borrower defaults on the loan.

    Many self-employed professionals like gig workers or solo entrepreneurs may find it challenging to get small business loans with the lack of a stable monthly income. They may be required to present some extra documentation to prove their ability to pay diligently.

    This article will delve into the best alternative financing solutions for self-employed professionals who are looking at expanding their business, consolidating debts, or keeping up with overhead costs. Even without a small business loan, self-employed individuals may still have access to liquid funds–with terms and rates that are specifically designed for them.

    How to Classify Self-Employed Professionals

    A person who is self-employed does not depend on his or her income from any employer. Also known as independent contractors, these professionals offer their products or services to their customers and are highly skilled. They may be sales consultants, artists, insurance agents, freelancers, and sole proprietors.

    Self-employed individuals are not to be confused with small business owners who have their own staff. Business owners usually don’t take part in the company’s day-to-day operations and focus more on decision-making processes. On the other hand, gig workers and sole proprietors look for clients to offer their services and pay their own taxes.

    Is It Harder to Get a Loan If You’re Self-Employed?

    Self-employed individuals may find it harder to get a loan regardless if they are applying for a personal or business loan. But this doesn’t mean that they won’t be able to get one.Most self-employed individuals would opt to get a personal loan to have sufficient funds for various purposes. But as a standard, lenders would require a minimum annual salary requirement–something that self-employed professionals cannot suffice.

    In which case, gig workers, freelancers or entrepreneurs may get funds by applying for small business loans. However, they may find it more difficult to get for a number of reasons.

    First, they cannot provide a steady source of income. In a self-employment setup, projects will come and go, so their sales fluctuate from time to time.

    Second, they don’t have sufficient business experience. Lenders may require a minimum of two years in business operations, depending on the type of financing they wish to get.

    Third, there is a poor cash flow forecast. Since monthly income is unpredictable, most self-employed professionals won’t be able to report a healthy cash flow unless they have 1) long-term projects with regular clients and 2) a proven track record of income for the past two years.

    Why Self-Employed Professionals Need Financing

    To get the business running, self-employed professionals need capital to get more clients, pay for operational expenses, and consolidate debts.

    Here are the most common ways self-employed professionals may use additional funds.

    1. Access to additional capital

    With more funds under their belt, self-employed professionals can purchase new office equipment or software, as well as repair personal computers. They also have sufficient money to pay for utilities, internet, and other operational expenses.

    2. Marketing and advertising

    Self-employed individuals need to invest time and money to get more clients. They need capital to sell themselves on social media platforms, print out ads, or launch ads that will help get more leads.

    3. Consolidating debts

    When projects end and money becomes tight, self-employed individuals may get financing to pay-off any outstanding balances and pay only one loan monthly. Taking out a loan to pay another loan may sound odd, but loan refinancing will go a long way in ensuring you stay on top of your debt repayments.

    4. Expand product line

    Growth is not only evident when you hire a hundred employees or set up physical stores. It may also mean expanding the business’ current product line so the owner can increase his or her revenue. With more products to choose from, customers have more chances of buying from the same store instead of looking elsewhere to find what they need.

    5. Pay for professional services

    During peak seasons, some solo entrepreneurs may need professional services from another gig worker. Those who need help during these times may pull extra cash from their account to pay for another person’s expertise.

    Here’s a more practical example: self-employed professionals need to pay an accountant monthly to handle their taxes. They don’t necessarily have to hire the accountant or purchase bookkeeping tools to do the job. They just have to pay them monthly for the services rendered.

    Alternative Financing for Self-Employed Professionals

    1. Cash advance

    A cash advance is a great financing option for self-employed individuals with poor credit. Lenders will no longer require the borrower to submit their credit history to get the funds. That means that regardless of their credit rating, they may get cash approved for a business cash advance in as early as 24 hours.

     Here’s how it works: credit card issuers will allow the borrower to take out a certain amount of cash using their card. Generally, cash advances have steep interest rates and service fees, but these are attractive to self-employed professionals because they may be approved in the soonest possible time.

     Once the borrower gets approved, they may withdraw the money at an ATM or via bank transfer. The most commonly used type of cash advance is a credit card cash advance, which allows the cardholder to borrow money from their credit card as they would with a business line of credit.

     The other types of cash advances are payday loans and merchant cash advances. Compared with a credit card cash advance, a merchant cash advance allows the borrower to seek funding against his or her transactions. It gives the business additional capital in exchange for a percentage of its future revenue.

    2. Term loans

    Term loans are offered to stable businesses with sound financial statements. It allows the borrowers to receive a lump sum cash upfront, which they can pay on an agreed repayment schedule. However, the borrower may need to pay a downpayment before the engagement. This downpayment will be deducted from the total cost of the loan.

    In a small business term loan, borrowers can pay between a few months up to ten years depending on a number of qualifications such as the borrower’s credit rating, business structure, length of time operating the business, and the purpose for taking out the term loan.

    Take note that when applying for a small business term loan, the self-employed individual may be required to put up collateral depending on their credentials and the type of term loan they are applying for. Some term loan examples are SBA term loans, multi-year term loans, asset-based term loans, small business bridge loans, and equipment term loans. You can learn more about these types of term loans by clicking this.

    3. Lines of credit

    Sometimes the borrower doesn’t necessarily need to take out a loan, but he or she doesn’t have enough money either for emergency situations. This is where a line of credit comes in: self-employed individuals may use a credit line to suffice for unexpected maintenance costs, equipment repair, or debt refinancing.

    A business  line of credit may be beneficial to small business owners who have just enough money to cover for operational expenses but don’t have the means to pay for immediate needs like increasing inventory during peak seasons or paying for a surge in operational expenses.

    With a credit line, self-employed individuals may withdraw funds from their account and pay back with interest what they’ve used. That means, the business owner may use this revolving fund anytime they need it without being obliged to pay monthly as they would with a loan.

    As long as the borrower repays the money they’ve taken from the credit line plus interest and other charges, the available amount goes back up. If the borrower won’t take out the funds, no interest charges will be incurred to the borrower.

    Compared with a cash advance, getting a business line of credit will require the borrower to submit their complete credit history, financial statements, the business’ annual revenue and cash flow.

    4. Microloans

    Microloans can be used for a variety of purposes, particularly if the self-employed professional doesn’t need a huge amount of capital. The maximum loan amount the borrower may get with an SBA microloan is $50,000, which can be used to pay for the purchase of a new computer, furniture, or office supplies. The interest rate ranges between 8% and 13%.

    The Small Business Administration (SBA) is one of the most popular providers of SBA microloans. The organization works with non-profit lenders like Community Development Financing Institutions (CDFIs) to release the financing. What the SBA does is they assume most of the risk by guaranteeing up to 85% of the loan.

    Microloans are very attractive to new entrepreneurs and self-employed individuals because they don’t need to have a minimum number of years in operation in order to qualify. They only need to show proof that they are responsible borrowers and their business has a positive cash flow forecast.

    On top of that, the SBA microloan minimum credit score is only 620, but other lenders will require up to 640 depending on the other business requirements you present. Collateral is also required since this reduces the lender’s risk. 

    Even though self-employed individuals may easily meet these minimum requirements, take note that getting an SBA microloan or any SBA loan in that regard may take longer than applying for alternative financing. The SBA will assume most of the risk, so borrowers will undergo document-intensive processes.

    5. Business credit cards

    Last but not least are business credit cards. Small business credit cards function as a credit line with a set credit limit, preventing users from overspending. This is very much like a consumer credit card: simply make the purchase as you would with cash then pay for the amount you owed before the due date.

    A business credit cards proves to be a convenient option for self-employed individuals because:

    • They can use the credit card to pay for small, immediate transactions
    • They can opt to purchase new devices or furniture on monthly installments at 0% interest
    • They can easily monitor their monthly expenses since all transactions are recorded in the credit card statemen
    • They can take advantage of rewards and accumulated points for business travel, rebates, or freebies

    Remember that while there are tremendous benefits to using a business credit card, it also comes with high interest rates. Borrowers must only use their business credit card for emergencies to avoid maxing out their credit limit. They must also pay on time to avoid paying hefty charges.

    Why Get Financing for Self-Employed Professionals with SMB Compass

    SMB Compass is dedicated to helping clients start and grow their business. Compared with other lending institutions, we provide clients with priority services that go beyond financing. We take time to discuss the client’s goals before providing them with the right strategies.

    At SMB Compass, we give self-employed professionals the leverage to accelerate their business through competitive financing that’s designed specifically for them.

    SMB Compass Application Process

    1. Focused brainstorming session.We want to understand you–your goals, your capabilities, and your plans for the business. We engage in a meeting with you to discuss how you want to scale your business.
    2. Focused brainstorming session. We want to understand you–your goals, your capabilities, and your plans for the business. We engage in a meeting with you to discuss how you want to scale your business.
    3. Choose & compare financial solutions. Based on the results of the assessment, our team will compile the most suitable financial solutions to support your needs–from equipment financing to business lines of credit.

    Is It Time for Self-Employed Professionals to Get Financing?

    Becoming his or her own boss becomes easier when self-employed professionals have access to funds. They can map out their next strategy with enough capital on-hand. SMB Compass helps these borrowers achieve their goals by providing a myriad of financing solutions that will support their growth. For us, there’s never been a more opportune time to grow the business than now.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.