Freelancing has become an incredibly popular way for men and women around the world to make money. Freelancing is, in essence, having your own business. It allows you to not just generate your own income, but to control how much you earn. When you freelance, you take charge of your own finances and work life. Even though you may not actually register as a business, but rather as an independent contractor doing freelancing work, you may have difficulty acquiring a loan.
Not every bank views freelance work with much respect or dignity. They don’t necessarily consider this to be ‘legitimate’ work. You may have a great client (or many) and the right financial tracking, but it’s still not enough.
A bank is worried about your debt, taxes, work and whether it’s consistent, and many other aspects, including how efficient and disciplined you may be as a business owner that they just aren’t willing to take a risk.
But you need money, so how are you going to do that as a freelancer? Depending on where you actually look, you might have to set up a legitimate bank account, but that’s not always necessary.
There are plenty of things a small business owner can do to not just increase their chances of getting a loan as a freelancer, but to also increase the financial support that can be instrumental at helping this fledgling business grow. One of the first things you should do is realize you aren’t just a self-employed person … you are a small business owner. This is a full-time job and you deserve the opportunity to work, earn money, and get out of debt to grow your business without having to necessarily go through a traditional bank.
Below we give basic advice that can help people turn their life as a freelancer into a golden opportunity through the right financing options.
First, make yourself appealing to a lender.
The first thing most people do when they look at acquiring a loan, whether they work for a business, have their own small business, or are working as a freelance businessperson, is to find a bank. Banks are lenders and while this could lead you down the road to massive debt, convoluted taxes, it may be necessary to grow your business, stay afloat, and get through some difficult times.
However, lenders are not going to survive long in the business of lending out money if they take chances with people who don’t have a great deal of appeal. If you can’t make a payment on that loan, if your business fails or you essentially give up, it’s going to hurt that bank or lender. They are not looking for bad debt, and even though you still have a lot of expenses, what they want is a sure bet.
That means it’s important for the freelancer to sit down and ask himself or herself some basic questions:
- Would I loan myself money? (Be honest about this.) What does your balance sheet look like? Do you have more red ink than black? Do you have too much debt already?
- What can I do to make this more appealing to a lender? Learn about what a loan officer is focusing on. When you can see things from that perspective, it will help make you a more appealing option for a lender.
- How much income do I have coming in regularly? What does your bank account look like? Do you have bounced checks? Not enough consistent income? Is everything organized well? Are you holding funds for the most part (or are you bleeding capital)?
On top of asking these simple questions, it’s also a good idea to gather all invoices, contracts, your most recent tax return, business plan, any payment plans you have, cash flow, student loan debt, communications, and more. These can all be provided to a prospective lender to show them that you are organized, have regular clients, and have pretty substantial clients, at that. If you have a solid business plan and initial success, it will also show a prospective lender that you know how to obtain more freelance work, and earn more income.
Second, increase your credit score as much as possible.
This may sound like common sense, but many freelancers have difficulty acquiring loans simply because they don’t have a good credit score. It’s not only your credit score that matters, though, but it does have a significant impact on whether or not you will be approved for a particular loan.
Some people incorrectly assume a business doesn’t need to worry about these scores, but unless you file as an LLC or S-Corporation, your personal score is what matters to a bank or other lender.
Of course, there are lenders that don’t place as strong an emphasis on credit scores as compared to other aspects of your financial history, assets, income, debt, and so on. However, if you have a relatively poor credit score, it doesn’t matter how much you’ll be bringing in every month with your business; as a freelancer, that can be a major problem.
Third, consider independent brokers.
Stay away from the high profile banks and other lenders. Freelancers will notoriously have a difficult time acquiring loans through a major bank or financial institution, mostly because freelancing is considered a tepid career option.
In other words, a major financial institution might view freelancing as being a flash in the pan venture, not something to take seriously. If you don’t take your taxes seriously, if you have a ton of debt, and if you don’t have a good, strong payment history as a freelance worker, it’s tough to be taken seriously.
Even though millions of people are now successfully freelancing and building careers around the world, financial institutions, especially the larger ones, still hold to those traditional (and frustrating) values.
Instead, focus on institutions that specialize or cater to self-employed individuals. You may consider yourself a freelancer, but what you are, at the end of the day, is self-employed.
As long as you have income that is consistent and you can prove this case to any prospective lender, that should put you in good standing when looking at nontraditional financial institutions for these loans.
What about interest rates?
When you’re considering a loan -whether it’s a loan modification, mortgage, student loan, business expansion loan, etc., you may be facing increased interest rates, especially when you begin looking at non-high street banks or non-traditional financial lenders. You don’t have to pay exorbitant interest rates, though, as long as you choose the right lender. Consider how higher interest will affect your taxes, your ability to afford health insurance, and other vital aspects of your life.
Creditloan.com, for example, is one of those places that supports freelancers, understands the challenges they face as self-employed and independent businessmen and businesswomen, and isn’t looking to take advantage of them just to increase their bottom line. With the right loan, you could even take advantage of some tax write-off benefits with these loans, depending on your home country.
Fourth, don’t assume freelancer loans are all available online.
Just because a person may spend the majority of their time looking for new clients, acquiring new jobs, and doing work online, that doesn’t mean freelancer loans are readily available online as well. It’s important to realize that you may have to sit down with a financial lender, bring your paperwork, including those invoices and client lists, to an to a person and discuss the loan options.
Some freelancers choose this type of work because they are shy, withdrawn, introverted, or have a difficult time in social situations. That may appeal to them with the relative anonymity of online work, but when looking for a serious freelancer loan, it may be necessary to sit down with an individual to talk about the options and what you can consider for your future.
Fifth, consider a guarantor loan.
When you’re a freelancer, many financial institutions consider you a risk, which is why it may be difficult to find loans in this type of work environment. If you know somebody with a solid job, great credit, and is willing to guarantee your loan (and they understand your work as a freelance businessperson), that can set a lot of lenders at ease. A guarantor is essentially someone with good credit, resources, and that will help guarantee payment of the loan in the event you default.
This may not be practical for a lot of freelancers, though, especially if their family, friends, and strongest support system doesn’t really understand what they do or doesn’t consider it to be a full-time career option. It won’t affect interest, income tax rates, or any other aspect of the money or how you use it (unless you make an arrangement with that guarantor ahead of time).
What can you do with a freelancer loan?
Expanding your business is one of the key elements about a loan of this nature. If you’re looking to take a loan out for something else, such as to go on vacation, to renovate your house, or even buy a car, it may be more difficult to acquire. As a serious business owner (if you haven’t thought of yourself that way just yet, it’s time you did), you need to focus on loans for your business growth.
Any bank or lender simply wants to know their risk, their investment is going to pay off.
A loan as a freelancer should be something that will help you expand your business operations, find more work, help you increase your revenue streams (the money you earn), and help you grow as a self-employed, independent worker. If you’re looking for a loan for some other purpose, you may certainly be able to acquire it, but keep in mind that a bank or lender is going to be looking for those interested in investing in their own future, their own growth, and that can help provide you a solid foundation upon which to apply for and acquire a great loan option.
Make sure you can make the payment.
When you take out a loan, there are several things you should be aware of (and keep in mind). First, know your self-employed tax rate. You will need to withhold your taxes from your income and might have to pay them quarterly. It’s a lot different than having an employer do this.
Second, understand your debts. Know how much money you need to earn. This will help you realize just how much work you need to bring in every day, week, month, and so on. When you freelance, it’s easy to become distracted by other, more exciting, things, so be sure you stay focused, set goals, and hit your target goals as a business owner.
Third, understand the re-payment schedule. The bank or lender will likely provide you with a schedule, and you need to make sure you can keep up. Set aside each payment as soon as you get it in.
This will ensure that when the time comes to make that payment, you don’t run behind, miss it, and get into trouble paying back the loan.
Remember, good loan re-payment the first time around will make it that much easier for you to secure another loan in the future, should that need arise.