Self-employed individuals, whether they are independent contractors, gig workers or small business owners, often face challenges getting small business loans.

How to get a business loan if you are self-employed

When you are an employee of another business, you can expect a regular paycheck. Your paystub makes it easier to apply and qualify for a car loan, credit card, or mortgage because it provides documentation of your income. When you are self-employed, however, you likely do not pay yourself formal payroll, and that lack of verifiable income can make getting self-employed loans more difficult. That means you will likely need to provide documentation that makes the lender comfortable extending financing to your business.

It is important to note here that if you report self-employment income to the IRS (usually on IRS Form Schedule C that is filed with your personal tax return), you can consider yourself a small business. That is true even if you have not formally created a business structure and operate as a sole proprietor rather than an LLC or S Corp. Yes, even an independent contractor or gig worker can be considered a small business owner!

How to qualify for a self-employed loan

Qualifying for small business loans will depend on a variety of factors. It boils down to the fact that lenders want to know the answers to two main questions:

Can you repay the loan?
Will you repay the loan?

To help answer these questions, they will often consider the following information:

Credit scores. Lenders will check the owner’s personal credit and/or your business credit files. Most lenders want to see good credit scores in the mid-600s or higher, though there are some types of financing that are more flexible. The lender may also check a business credit report and a business credit score as well.

Time in business. Many lenders prefer to extend financing to businesses that are at least two years old. There are exceptions, but options for new businesses are much more limited. Your date of incorporation is the easiest way to demonstrate time of business, but if that does not apply, you may use the date you received your Employer Identification Number (EIN), business license, or the date you filed a fictitious name (DBA) as your start date.

Revenues. If you are trying to get a true small business loan (rather than a personal loan you use for business purposes), you will need to demonstrate that your business is making money. The lender may request business tax returns or business bank statements to verify those revenues. It may even ask you to link your business bank account to analyze revenues. Most lending options start with business revenues of $120,000 per year or more. Anything less it will be very difficult to obtain any financing.