4 Loans for the Self-Employed and How to Apply for Them

Tom
Tom August 2022 Content Creator 11 min

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Applying for loans works a little differently when you’re self-employed. The same could be true of almost everything for the self-employed, whether it be taxes, banking, or health insurance, so you’re probably not too thrilled to hear there’s a few extra steps to applying for a loan. 

Fortunately, that doesn’t mean loans are out of your reach as a freelancer or other kind of entrepreneur. In fact, it’s really just a matter of familiarising yourself with the requirements. 

In this post, we’re going to go through some of the major loans for the self-employed. We’ll then discuss what to do to secure yourself a loan, and how under certain conditions your situation may change. 

Loans for the self-employed in a nutshell

  • There are loans available for the self-employed, however they often come with extra conditions
  • Personal loans can be obtained online or in person, or with a credit card
  • Business loans take the from the the SBA, on business credit cards, or on a business line of credit
  • There are always government loans available, with generous repayment plans or non-repayable cash rewards
  • Guarantor loans provide extra security and repayment assistance
  • Bad credit loans are often available online and have lower offers with flexible repayment plans
  • Loans can be taken out with no proof of income, in the form of guarantor-assisted ones or with the lender’s assets

Do lenders offer loans for the self-employed?

There are many types of loans available for self-employed workers. Your options will be somewhat limited and come with certain conditions, however. This is because proving your income and a clear picture of your financial situation is more difficult than demonstrating a salary at a full-time job. Lenders want proof that you are able to pay back the loan.

Types of loans for the self-employed

The below types of loans depend on the nature and size of your business. Each will offer different repayment conditions and fund your business in different ways. Understanding each of them will help you decide which is best for you. 

Personal loan for the self-employed

Personal loans are lent by banks, credit unions, or online lenders, and paid back in fixed monthly instalments over several years. It’s common to seek out personal loans for their non-discretionary nature. Debt consolidation, where the debtor takes out a loan to cover other unpaid debts, is a common situation in which personal loans are used. 

While many other loans are backed by collateral, i.e. assets such as property, personal loans are usually unsecured. Instead of looking at your assets, lenders assess your credit history, cash flow, and debt-to-income ratio. 

If you don’t qualify for an unsecured loan after the lender analyses your credit, you may be alternatively offered a secured or co-signed loan. With these loans, you can secure yourself by providing an asset as collateral.

Common assets for signed loans include: 

  • Car
  • House
  • Land
  • Office space
  • Investments/shares

Personal loans come in two different forms: online and traditional loans and credit card loans.

Online and traditional

Convenient, fast, and often with lower rates, online loans will let you complete the entire lending process without ever stepping outside your bedroom. 

Online loans may come from an online-only lender, who has set up their services in the same way a neobank has, i.e. they provide all of their services online and have no branches to visit. Or, a more traditional lender with a physical presence may offer an online option for lending, thus expanding their reach. 

While online loans are safe and secure, a traditional loan offers you the chance to speak with a representative. Here, you can plead your case and perhaps work out more complex terms. The process for traditional loans takes longer, but it may be worth it if your situation requires more analyses than what an online lender offers. 

Credit card

Like online loans, credit card loans are fast and convenient ways to get cash. Your credit card issuer may offer you a loan via your online account or app. How much you will be able to borrow depends on a few factors: 

  • Available credit
  • Monthly spending habits
  • Creditworthiness

…among others. The issuer will then offer you fixed loan repayment terms, which you can choose between. These may be anywhere up to five years. It’s important to know that while you can keep using the credit card with which you took out the loan, you should be extra careful to stay under your limit to not incur costly extra fees.

There are some risks worth considering when it comes to credit card loans. For instance, while they are generally cheaper than personal loans from traditional or online loan companies, depending on the size of your loan, the repayment plans can be quite steep. Taking out a credit card loan can also affect your credit history and reputation, so make sure you can pay it back comfortably before making the decision. 

Credit card loans are best used for emergency expenses when you lack savings, rather than for holidays or personal expenses. 

Business loans for the self-employed

Taking out a business loan as a self-employed person is creating a debt that your company is required to repay according to the conditions of the loan. Your loan size will obviously depend on your needs and financial stability of your company, but it is likely to be a larger loan than what an individual freelancer or self-employed person will take out. 

Your company’s needs for a loan could include:

  • Getting your company off the ground
  • Office supplies
  • Projects and campaigns

…among others. Your company business loan will likely include input and discussion from other founders who may influence the needs and expectations of the loan. 

SBA microloans

The US Small Business Association (SBA) has a microloan program which offers funding to non-profit lenders. These lenders may then provide loans of up to $50,000 US to companies. These ‘microloans’ have no minimum amount, however the nonprofit lenders to whom the money is provided may set minimums of their own. 

Interest rates on the microloan will be based on the lender’s costs and your credit rating and financial history. 

Business credit cards

Specifically designed for small businesses, business credit cards are a flexible and convenient way to make business expenses. Loans on a business credit card work basically the same way as personal ones, however you are demonstrating your company’s credit rating and financial history. 

In applying for a loan, you will demonstrate your company’s performance over a period of time and estimate accordingly. 

Business lines of credit

An unsecured line of credit, this will provide a loan to your company for any kind of expense you wish. Because it’s unsecured, your company won’t need to put up any collateral for the loan. Business lines of credit help companies better manage cash flows by assigning certain expenses to the line of credit. 

Typically, you’ll withdraw funds from the line of credit via a business checking account, business credit card, or mobile banking app.

Requirements to secure a business line of credit could include: 

  • Business ownership for a certain length of time
  • Demonstration of financial stability
  • Long-term spending plans

The lasting advantage of taking out a business line of credit is, if you stick to the repayment plan, you will better secure your company for future credit lines and more flexible repayment plans. 

Government loans for the self-employed

Most countries offer loans for start-ups and new businesses. These can be especially useful for early businesses, as there are many grants encouraging new businesses and offering generous lump sums. 

Things to keep in mind when applying for a government loan:

  • There will be a minimum length of time for which your business must have been in operation.
  • Loans will usually include a fixed interest rate. 
  • There may be many different loan types. Choose the one which best suits your particular business. 
  • COVID-19 may have changed the conditions of certain loans. 

Guarantor loans

If your financial circumstances make meeting loan repayment terms difficult, you can seek out a guarantor for your loan. Guarantor loans allow the borrower to elect a person who promises to pay the debt if the borrower is unable to. A guarantor may also be referred to as a ‘surety’. 

Your guarantor usually needs to be over 18 years of age and residing in the same country your company is based. They will likely need to have an exceptional credit history and more than sufficient income to cover the expenses. If you are frequently late on payments, your guarantor may have to pay extra fees to cover the repayments. 

The purposes of hiring a guarantor range from assisting lenders with poor credit histories, to providing extra assistance when the lender’s income isn’t high enough.   

Limited and unlimited guarantors

Guarantors can be both limited and unlimited, referring to the length of time for which the guarantor has agreed to help the lender. For example, if you only need a guarantor to cover six months of a twelve month repayment plan, you are then liable for the remaining six months of payments—your guarantor has completed their part of the deal.

While a guarantor is useful for getting a loan approved that you might otherwise not have been able to afford, if the guarantor fails to meet their obligations, the responsibility comes back around to you. This can in turn negatively affect your credit history. Choose your guarantor wisely and, even if you know the person, ask for financial records in case. 

How to secure a loan if you’re self-employed

Applying for a loan means looking at all the possible providers available to you. Here are some of the major areas where you will likely find a loan suitable to you:

  • Online: online lenders, bank websites, loan office websites
  • Bank branches: loan officers, in-person meetings
  • Mobile apps: lending apps, financial institutions, banking apps

What documents are needed to apply for a loan?

What you’ll need to present in order to secure a loan will depend somewhat on where you are applying for it. However, you should expect to provide the following categories of personal and financial information:

  • Proof of photo identity
  • Proof of residence
  • Proof of residence ownership (if applicable)
  • Proof of office address (if applicable)
  • Proof of business existence
  • Proof of income
  • Bank statement
  • Business plan
  • Proof of investment (if applicable)
  • Personal photograph

Are there self-employed loans with bad credit?

Since self-employed income is often fluctuating and there’s usually a lack of financial stability in the beginning stages, you may find yourself applying for a loan with less than desirable credit. A bad credit loan simply refers to a loan provided to someone with a poor credit history or lack of financial stability. 

Fortunately, many institutions offer bad credit loans to the self-employed. These loans often lend smaller amounts, but they offer flexible repayment plans with minor fees if the conditions aren’t met. Your credit score rating will also affect the interest rate of the loan. 

Are there loans for the self-employed with no proof of income?

Learn more about loans for self-employed

Loans with no income verification will instead depend on collateral or a guarantor. If you have assets which can be seized with no serious damage done to your company or freelancing business, you might consider putting those assets up for collection if you fail to meet the repayments. Otherwise, if you can work out a suitable deal with a guarantor who is willing to cover costs, this is worth doing also. 

Conclusion: loans for the self-employed

Applying for loans as a company owner or freelancer shouldn’t be something you feel you need to stay away from. There are so many options and repayment plans to fit businesses and entrepreneurs at all different stages, from founding to successful company ownership. 

Finding the right loan for you takes research, but it’s well worth your time.

Below, our table displays the Germany-specific loan options, equivalent to those above. 

German titleLoan typeFundingEligibility
GründungszuschussUnemployment benefits Amount of previous unemployment benefit + €300
After six months, €300 per month for 9 months 
Those planning to transition from employment to self-employment, with at least 150 days unemployment benefits remaining (Arbeitslosengeld – I)
EinstiegsgeldUnemployment benefitsNo more than 50% of unemployment benefitsThose receiving Arbeitslosengeld – II
(none)EU-backed startup loanDepending on your financial institutionThose beginning their startup ventures
GWR grant (Gemeinschaftsaufgabe ‘Verbesserung der regionalen Wirtschaftsstruktur’) Non-repayable cash payments for new businessesCovering a maximum of 40% of startup costsThose starting out in the manufacturing and service industries
BeratungsförderungConsultant-assisted fundingDepending on the outcome of your consultationAny self employed person or company with a business plan

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