Running a business is hard. Running a business where you're the only boss, employee, and everything in between? Even harder.

But being self-employed doesn't mean you can't access the same financial resources. With the right know-how and preparation, you can secure all the funding you need to grow your business and achieve your goals.

Here's a guide to loans for self-employed individuals, including:

• Requirements and how to apply
• Tips to improve your chances of approval
• The different kinds of loans you can leverage (rated & ranked)
• Personal finance management tips

Let's get into it!

P.S. — do you own your home? If you do, you can use the equity saved in your property to get higher loan amounts at 6-16% interest rates (which is leagues better than most other unsecured loans on the market). Lotly works with 50+ lenders nationwide to ensure you get the best terms possible — book a free consultation to see if we're the right fit for you.

Why self-employed professionals get loans

Working for yourself can be quite a journey, which means you might need a loan for anything from ice cream van repairs to office space rental. Generally, however, your reasons for getting a loan can fall into a few different categories:

• Starting a new business: If you're just starting out, it can be tough to cover all the expenses of launching a business. A loan can help bridge the gap until your business starts making money.
• Expanding your existing business: As your business grows, you may need additional funds for equipment, hiring employees, or moving into a bigger space. A loan can give you the resources to take your business to the next level.
• Covering cash flow gaps: Self-employed individuals often experience fluctuations in income and may need a loan to cover periods when cash flow is low.
• Investing in education or training: As a self-employed professional, investing in yourself is crucial for staying competitive. A loan can help you cover the costs of education or training programs to enhance your skills and knowledge.
• Consolidating debt: If you have multiple high-interest loans, consolidating them into one lower-interest loan can make it easier to manage your debt and save money on interest payments.

5 kinds of loans for self-employed borrowers

In this section, we'll cover five different kinds of loans you can use as a self-employed borrower, rating them on repayability, average interest rates, flexibility, risk level, and difficulty of requirements.

1. Unsecured Personal Loans

Unsecured personal loans are a common option for self-employed individuals who need funds without collateral. These loans are based on your creditworthiness and income. LoansCanada offers various types of personal loans.

• Repayability: 3.5/5
  Monthly payments are fixed, but the absence of collateral means higher interest rates, making repayment more challenging if cash flow is inconsistent.
• Average Interest Rates: 9% - 36%
  Rating: 2.5/5
  Interest rates vary widely depending on credit score and lender; rates are generally higher than secured loans.
• Flexibility: 4/5
  You can use the funds for any purpose, making it highly flexible, and repayment terms can often be negotiated.
• Risk Level: 3/5
  No collateral is required, so personal assets aren’t at risk, but missed payments can heavily impact credit scores.
• Difficulty of Requirements: 3/5
  Requires a good credit score and proof of consistent income, making it moderately challenging to qualify for.

Verdict: Ideal for self-employed individuals with a strong credit history who need funds for various purposes. Suitable for professionals in stable industries like consulting or freelancing. Remember that this does not mean seeking payday loans for self-employed workers. 

2. Secured Business Loans

Secured business loans require collateral, such as property, vehicles, or equipment, which reduces the lender's risk and can result in better terms.

• Repayability: 4/5
  Lower interest rates and longer repayment terms make these loans easier to repay, especially with consistent business revenue.
• Average Interest Rates: 5% - 15%
  Rating: 4/5
  Interest rates are generally lower due to the collateral provided, which benefits long-term projects.
• Flexibility: 3/5
  While funds are often used for business-specific purposes, flexibility is less than unsecured loans.
• Risk Level: 2.5/5
  Rating: Medium risk; if you default, you could lose the collateral, making this riskier than unsecured options.
• Difficulty of Requirements: 2/5
  Requires significant collateral and strong business financials, making it harder to qualify.

Verdict: Best for self-employed business owners in industries with significant capital needs, like construction or manufacturing, who have valuable assets to secure the loan. Looking for a business loan? Check your options at LoansCanada.

3. Business Line of Credit

A business line of credit offers flexible borrowing up to a certain limit, which you can draw from as needed.

• Repayability: 4.5/5
  Pay interest only on the amount borrowed, and flexible payment terms make this highly repayable.
• Average Interest Rates: 7% - 25%
  Rating: 3.5/5
  Rates vary depending on your credit score and collateral but are generally competitive for short-term needs.
• Flexibility: 5/5
  Maximum flexibility; borrow as much or as little as needed, and pay back based on cash flow.
• Risk Level: 3.5/5
  Risk is moderate; while there’s no collateral requirement, overextending could strain cash flow.
• Difficulty of Requirements: 3/5
  Requires a good credit score and proof of ongoing business income, which might be tough for newer businesses.

Verdict: Ideal for self-employed professionals with fluctuating income streams, such as those in the retail or service industries, needing quick access to funds for short-term expenses.

4. Merchant Cash Advance (MCA)

MCAs provide a lump sum in exchange for a percentage of future sales, commonly used by businesses with high credit card transactions.

• Repayability: 2/5
  Repayment is based on a percentage of sales, which can be unpredictable and expensive if sales are low.
• Average Interest Rates: 20% - 250%
  Rating: 1/5
  Very high effective interest rates, often leading to debt cycles.
• Flexibility: 4/5
  Funds are typically available quickly and can be used for any purpose, offering good flexibility.
• Risk Level: 2/5
  High risk due to the potential for spiraling debt and difficulty managing cash flow with a fluctuating repayment rate.
• Difficulty of Requirements: 4.5/5
  Very accessible, with minimal credit requirements, making it easy to obtain.

Verdict: Best for high-risk, high-reward industries like e-commerce or restaurants with high daily sales but inconsistent revenue. Use with caution due to high costs.

5. Invoice Financing

Invoice financing allows businesses to borrow against their accounts receivable, providing immediate cash flow without waiting for customer payments.

• Repayability: 4/5
  As repayments are tied to invoice payments, it’s easier to manage as the loan is repaid once customers pay their invoices.
• Average Interest Rates: 1% - 5% per month
  Rating: 3.5/5
  Interest rates can add up quickly but are typically lower than MCA or payday loans.
• Flexibility: 3.5/5
  Funds are tied to invoices, so usage is limited but effective for maintaining cash flow.
• Risk Level: 3/5
  Moderate risk as it depends on customer payments, which can be unpredictable.
• Difficulty of Requirements: 4/5
  Easier to qualify for if you have a solid customer base and reliable receivables.

Verdict: Ideal for businesses in industries like B2B services, manufacturing, or wholesale, where waiting on client payments can strain cash flow.

Requirements for self-employed borrowers to qualify for loans

As expected, this will vary between lenders, but you'll need to demonstrate at least a few of the following for most:

• Proof of income: This could be in the form of tax returns, bank statements, or invoices.
• Credit score: Lenders will typically require a minimum credit score to qualify for loans. The higher your credit score, the better loan terms you can receive.
• Collateral: Depending on the type and amount of loan, you may need to provide collateral such as property or equipment to secure the loan.
• Business plan: Some lenders may ask for a business plan to assess your ability to repay the loan.
• Industry experience: If you're self-employed in a specific industry, some lenders may require that you have a certain number of years of experience in that field.

It's important to note that the requirements for self-employed borrowers may be more strict compared to those who are employed by a company. This is because lenders perceive self-employment as a higher risk, as income can vary and may only sometimes be consistent.

Tips for improving your chances of loan approval

If you're a self-employed individual looking to secure a loan, here are some tips to increase your chances of approval:

1. Prepare documentation: Gather all required documents ahead of time and ensure they accurately reflect your income and business. This includes tax returns, bank statements, and invoices.
2. Build good credit: Work on improving your credit score before applying for a loan. This can increase your chances of getting approved and receiving better loan terms. You can also check your credit for free online.
3. Create a strong business plan: A well-thought-out business plan can demonstrate your ability to manage finances and repay the loan.
4. Provide collateral if needed: If you have assets that can be used as collateral, consider offering them to secure the loan and increase lender confidence in approving your application.
5. Show industry experience: Highlight your years of experience in a specific industry if required by the lender.
6. Be prepared for higher interest rates: As a self-employed borrower, you may be subject to higher interest rates due to perceived risks from lenders. Be prepared for this possibility and shop around for the best rates.
7. Consider alternative lenders: Traditional banks and financial institutions may have more stringent requirements for self-employed individuals. Consider alternative lenders like credit unions that may have more flexible lending options.
8. Be honest and transparent: It's essential to be honest about your income and business when applying for a loan. Lenders will verify the information you provide, so it's crucial to be transparent from the start.
9. Maintain accurate records: Keep thorough and organized records of your business finances to make the application process smoother and easier for both you and the lender.
10. Work with an experienced accountant or financial advisor: Seeking professional advice from an experienced accountant or financial advisor can help you navigate the loan application process and improve your chances of getting approved.

Overall, securing a loan as a self-employed individual may require more effort and preparation than traditional employees. However, with careful planning, transparency, and professional guidance, it is possible to obtain financing for your business or personal needs.

Keep these tips in mind when applying for a loan, and don't be discouraged if you face challenges – there are lenders who understand and support the unique circumstances of self-employed individuals.

Alternatives to personal loans for self-employed borrowers

While most self-employed individuals default to unsecured personal loans, as we've discussed, there are several attractive alternatives. Here are a few specific ones that might be of interest:

If you're a homeowner:

• Home equity loans: If you have equity in your home, you can use it as collateral for a loan. This option may provide lower interest rates than personal loans, but remember that defaulting on the loan could result in losing your home.
• Home equity line of credit (HELOC): Similar to a home equity loan, a HELOC allows you to borrow against the value of your home. However, instead of receiving a lump sum upfront, you can access funds as needed up to a predetermined limit. Interest rates may vary and are typically adjustable. Lotly offers both Home equity loans and HELOCs – apply today to learn more about your options.

If you need financing for your business:

• Business credit cards: If you're looking for smaller amounts of capital or need quick access to funds, business credit cards can be a viable option. However, keep in mind that they typically come with higher interest rates and may require a personal guarantee.
• Business line of credit: Similar to a HELOC, a business line of credit allows you to borrow against your company's assets as needed. This type of financing is best suited for ongoing expenses or unexpected cash flow gaps.

If you own a vehicle:

• Car title loans:  If you have a paid-off vehicle, you can use it as collateral for a loan. These loans typically come with high interest rates and short repayment periods, so they should be used as a last resort for self-employed people.
• Auto equity loans: This type of loan allows you to borrow against your vehicle's value, even if you still owe money on it. Like car title loans, auto equity loans may have high interest rates and short repayment terms.

Other options:

• Peer-to-peer lending: This is a form of borrowing where individuals lend money directly to borrowers through online platforms. Rates and terms vary depending on the platform and your creditworthiness.
• Crowdfunding: If your financing needs are for a specific project or product, crowdfunding can be a great option. You can use platforms like Kickstarter or Indiegogo to raise funds from a large number of people.
• Family and friends: This can be a good option if you have trusted family or friends willing to lend you money. However, treat it as a formal loan with clear terms and repayment plans to avoid any strain on your relationships.

Carefully weigh all of your options before deciding on the best financing option for your needs. Consider factors such as interest rates, repayment terms, and potential impact on your personal assets.

How to manage your finances as a self-employed borrower

Without a CFO to keep you in check, managing your finances as a self-employed borrower can be tricky. Here are some tips to help you stay on top of your finances:

• Create a budget: As a self-employed borrower, your income may fluctuate monthly. Creating a budget can help you plan for both slow and busy periods and ensure you have enough funds to cover your expenses.
• Keep track of invoices and payments: Stay organized and keep track of all the money coming in and going out. This will also help you with tax preparation.
• Set aside savings for taxes: Unlike traditional employees, self-employed individuals are responsible for paying their own taxes. Make sure to set aside a portion of your earnings each month to cover your tax obligations.
• Consider hiring an accountant: If managing your finances becomes too overwhelming, consider hiring an accountant to help you stay on top of things and provide expert advice.
• Stay financially disciplined: It's essential to be financially disciplined. Avoid overspending or taking on more debt than you can handle. Stick to your budget and only borrow what you truly need.
• Differentiate between personal and professional:  Keep your personal and professional finances separate. This will not only make tax preparation easier but also help you better understand the financial health of your business.
• Plan for retirement: As a self-employed borrower, it's easy to prioritize your current financial needs over long-term goals like retirement. However, you should start planning and saving for retirement early on to secure your future.

Remember, managing finances as a self-employed borrower requires discipline and organization. Stay on top of your finances, plan ahead for taxes and retirement, and seek professional help when needed.

Unlock your home's value to power your business with Lotly

Let's recap all we've learned so far:

• Recognize your unique financial needs as a self-employed professional. Loans play a crucial role in business operations and personal financial management, including debt consolidation and personal development.
• Understand the various loan options available. You can access a range of financial products, each with specific advantages and disadvantages, tailored to their unique circumstances.
• Evaluating the qualification requirements for self-employed loans. Lenders demand proof of income, creditworthiness, and sometimes collateral due to the higher perceived risks of self-employment.
• Exploring alternatives to traditional personal loans. Options like home equity loans, business credit cards, and peer-to-peer lending offer flexibility based on the borrower's specific needs.

Speaking of alternatives — a HELOC or home equity loan might be a much better option for self-employed individuals who own their homes. With longer repayment terms and favourable interest rates than other loans, you can grow your business without the headaches.

Here at Lotly, we work with you to understand your specific financial needs, then work with our network of over 50 lenders across Canada to find you the best possible loan deal. Get a free consultation to see what we can do for you today.

FAQs

How can I borrow money if I am self-employed?

Yes! As a self-employed individual, you can access various loan options to meet your financial needs. These include traditional personal loans, home equity loans, business credit cards, and peer-to-peer lending. Each option has advantages and disadvantages, so it's important to research and determine which is best for your unique circumstances.

Can you get a loan if you are an independent contractor?

Yes, independent contractors can also access loans to fund their business or personal needs. However, lenders often require proof of income and creditworthiness to ensure that the borrower can repay the loan. Collateral may also be required in some cases.

What is a self-employed borrower?

A self-employed borrower is an individual who owns their own business or works as an independent contractor and does not receive a regular paycheck from an employer. They are responsible for managing their own income and expenses, sometimes making them a high-risk category for lenders. However, many loan options are still available to self-employed borrowers to help them achieve their financial goals.

Can I get a personal loan as a self-employed person with no proof of income?

Yes, it is possible to get a personal loan for self-employed individuals without proof of income, with things like no-doc loans. However, the eligibility criteria and interest rates may vary depending on the lender. We recommend providing alternative forms of employment income documentation, such as bank statements or tax returns, to increase the chances of approval and secure a favorable interest rate.

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