A self-employed loan is a type of business loan that sole proprietors and small businesses can use to finance the cost of starting or expanding their business. Self employed loans are not technically different from any other type of installment/term loan, but they have some unique features that make them more suitable for certain borrowers. For example, if you are a sole proprietor or freelancer who wants to borrow money to buy equipment for your company, then this type of financing may be right for you.
This blog post will discuss what qualifies someone as self-employed and how a borrower’s credit score impacts eligibility for these loans. We will also review the criteria required by lenders to qualify for a loan.
Understanding A Self-Employed Individual
A self-employed individual owns and operates their own business, as opposed to working for an employer or in corporate America. This includes freelancers, sole proprietors, consultants, contractors, and others without the backing of a larger company.
A self-employed individual is someone who owns and operates their own business, as opposed to working for an employer or in corporate America. This includes freelancers, sole proprietors, consultants, contractors, and others without the backing of a larger company. If you are wondering if you qualify as self-employed, then it’s important to understand what type of employment status qualifies one with being self-employed:
- freelance workers – these individuals work on temporary contracts that typically last less than 12 months at a time;
- sole proprietors/consultants – people such as lawyers, accountants, etc. who operate their own business;
- contractor – an individual who performs a service for someone else and is subject to the terms of their contract. For example, a plumber, painter, etc.
Understanding Eligibility
To qualify for most types of small business loans, you will need a credit score above 660. However, suppose your credit score falls below that threshold. In that case, some lenders may approve your application based on other factors such as assets (such as savings) or net worth, increasing eligibility requirements.
Lenders also consider whether applicants are already repaying personal debt with monthly payments when they evaluate applications for any type of installment/term loan, including those specifically for self-employed individuals.
Understanding Loan Qualifying Criteria
A borrower’s credit score does not typically have a significant impact on eligibility for self-employed loans; however, the loan will automatically be evaluated as “substandard” (as opposed to “prime”) because they are riskier and lenders expect higher interest rates.
The qualification criteria that lenders most commonly use to qualify you for self-employment or small business loan include:
- your income and assets – which can increase eligibility requirements;
- whether you have any other debt obligations, including mortgages, car payments, student loans, etc.;
- bank statements showing your cash flow over the past 12 months;
- tax returns from previous years when applying for an unsecured type of loan such as a line of credit;
- Be able to prove your business exists.
How Do I Prove My Business Exists When Applying For This Loan?
To prove your business is legitimate, lenders will require that you provide:
- proof of annual revenue – for instance, tax returns from previous years or bank statements showing 12 months worth of monthly income;
- a letter detailing the reasons why you need this loan and what it will be used for;
- invoices relating to purchases made in the past year (for example, if you are buying equipment.)
If a borrower has an established track record with their current lender, they may not have to supply these documents. It’s also possible that some banks might offer loans without requiring all of these items listed above. However, as a general rule, Most lenders ask borrowers for documentation before approving any small business loan application.
After providing this documentation, lenders will perform a credit and financial background check.
Will Your Credit Be Affected When Applying For A Self-Employed Loan?
Applying for any type of loan will have an impact on your credit score. Suppose you are applying for a self-employed or small business loan. In that case, likely, it will automatically be evaluated as “substandard” (as opposed to “prime”) because they are riskier and lenders expect higher interest rates. The borrower’s credit score does not typically have a significant impact on eligibility for self-employed loans.
Do You Qualify For A Self-Employed Loan?
Are you a self-employed individual who has been looking for a way to finance the cost of starting or expanding your business?
For most people, qualifying for an installment/term loan requires good credit and making between $25-$35 thousand per year before taxes. If these qualifications do not apply to you, other options are available, such as using savings, equity in your home, borrowing from family members, etc.
As long as you have some form of collateral that can be used if the borrower defaults on their payments, lenders will approve loans even without good personal credit! This is why it’s important to compare all different types of financing when applying for any type of small business loan, including those specifically available only to self-employed individuals.
Will You Need A Co-Signer For This Particular Loan?
Lenders may require a co-signer for any type of installment/term loan, including those specifically for self-employed individuals. This requirement is almost always in place if your personal credit score falls below 660. They will typically be someone with good or excellent personal credit who can help you qualify by agreeing to take responsibility for the debt should anything go wrong.
In conclusion, there are many factors involved when applying for small business or self-employment loans. Understanding what the requirements are and how to meet eligibility will help you in expanding your business.
