Loans for the Self-Employed: How to Apply

4 common types of self-employment

You might be considered self-employed by the IRS if you’re a business owner, a business partner, an independent contractor, or in business for yourself.² Here are four common types of self-employed workers.

1. Gig workers

Gig workers, such as those in ride-hailing, maintenance, or food delivery, often find jobs through websites or apps. They typically perform tasks and have little expectation of long-term work. This type of work may be informal or structured as an on-demand service.

2. Freelancers

Freelancers are non-permanent workers doing jobs such as programming, writing, or graphic design. They may work on a variety of projects for different clients. They choose jobs, set their pay, and handle taxes themselves. They’re typically paid by the hour or the project.

3. Independent contractors

Independent contractors function as temporary employees, but they may work for multiple clients at the same time. They sometimes find clients through staffing agencies that set their payment rates. These workers include specialists in construction, law, or medicine. Like freelancers, independent contractors are typically paid by the hour or project.

4. Small business owners

Small business owners are self-employed workers who own a business entity. This could be as a sole proprietorship, a limited liability corporation (LLC), a partnership, or a corporation.

3 reasons getting a loan can be challenging for the self-employed

Lenders favor low-risk applicants who can prove consistent profit and sources of income. Without a W-2 form or pay stub from an employer that verifies your income, you might face hurdles meeting a bank’s eligibility requirements.

1. Proving your income takes more paperwork

A prospective self-employed borrower may need to provide extra documents to prove their business income. Instead of submitting a W-2 form, you might be asked to share bank statements or tax forms. These can include 1099s if you’re a freelancer, gig worker, or independent contractor,³ 1120s for corporations,⁴ or 1065s for partnerships.⁵

You may also be asked for your tax returns and bank account statements. The lender will want to see that you’re depositing enough money to cover the monthly loan payments. And you could be required to show other financial information, such as social security benefits statements or court-ordered agreements.

2. Inconsistent income might be a barrier

Income can ebb and flow for many self-employed workers. You’ll need to prove that you have a consistent income over time with a history of on-time payments. Freelancers and independent contractors often manage many projects with different payment schedules, which can seem like unpredictable income to potential lenders.

3. Lower taxable income can work against you

As a self-employed worker, you may be able to deduct many business expenses. However, reporting lower adjusted gross and taxable incomes can affect your loan eligibility. Lenders might focus on your net income after your deductions rather than your overall revenue. Consider consulting with a tax professional or financial advisor if you have questions.

6 essential eligibility criteria lenders consider

Lenders weigh multiple factors before approving a loan. Each loan type has distinct criteria that lenders apply, and your approval will depend on confirmation of some or all of the following elements.

Solid credit history: Your credit history shows how you’ve managed your credit over time, which affects your credit score. Your credit report includes information such as the number of credit cards you have, the amount of debt you carry, and if you pay your bills on time.
Good credit scores: Your credit score provides lenders with a measure of your creditworthiness, which gauges how likely you are to make on-time payments.
Strong revenue and income: Revenue is the total amount of money you earn over a specific amount of time. Income is the amount of money you keep after your expenses are deducted.
Healthy debt-to-income ratio: Your debt-to-income ratio compares your monthly bill payments to your gross monthly income. It’s calculated by dividing your total monthly debt payments—such as rent, credit cards, and car payments—by your monthly income.
Steady work history: Your employment history is a list of companies you’ve worked for, including your job titles and dates of employment.
Personal savings accounts: Your savings include how much money you’ve set aside for the future, including savings and retirement accounts, certificates of deposits, investment income, and more.

What are loan options for self-employed people?

There are many types of loans that people with any kind of job might seek depending on their financial needs and goals.

Secured loans, including a mortgage, car loan, or boat loan, can use property or assets as collateral to help guarantee the loan. Other loans are unsecured, meaning they’re approved based on the financial history of the borrower.

If you’re self-employed and looking to cover living expenses, new equipment, or other important purchases, you have several possibilities. Below are some loan options you might consider, depending on your situation.

Personal loan

Personal loans offer flexibility for a variety of uses, such as unexpected expenses and debt consolidation. They also offer flexible repayment terms, a fixed interest rate, and a set monthly payment. For example, if you get approved for a $15,000 loan at 12.99% APR for a term of 36 months, you'll pay just $505 per month.

With a Discover® personal loan, there are flexible repayment terms for all loan amounts—36, 48, 60, 72, and 84 months. Also, there are no fees of any kind. At Discover, personal loan amounts range from $2,500 to $40,000.

Credit cards

Whether you’re a gig worker, freelancer, independent contractor, or small business owner, you can use credit cards to pay for expenses. However, these often have higher interest rates than other types of loans which could lead to a lot in interest over time.

You could also consider using a credit card for a cash advance, which lets you borrow against your available credit limit. However, keep in mind that you might start accruing interest from the transaction date, and there could be a service fee.

Secured loan or line of credit

If you own a business or have other assets, you may be able to use those as collateral for a secured loan. By securing the loan with a dedicated savings account, a car, boat, or other asset, you can potentially request more money with longer repayment terms. A secured loan can be structured as a lump sum or a line of credit, which allows you to borrow repeatedly up to your credit limit.

Small business loan

If you’re a sole proprietor or own an LLC, a traditional small business loan might be an option. Small business loans can be used for many purposes, such as buying new equipment and real estate purchases. These loans can be obtained from several sources, including banks, credit unions, online lenders, and community nonprofits.

You can also research the U.S. Small Business Administration (SBA), which offers several loan programs. For instance, an SBA micro loan provides up to $50,000 to help small businesses grow but can’t be used to buy real estate or pay existing debts.

What should you know before you apply for a loan as a self-employed worker?

Before you apply for any loan, it’s important to do some research. Here are some tips on how to proceed.

Assess your funding needs and financial situation

Look at your income and debts as well as your monthly costs and recent tax returns. A strong understanding of your finances can help you determine the best type of loan for you.

Check for pre-qualified offers

Research loan options at financial institutions where you currently have accounts or credit cards. You may already have pre-qualified offers. Banks may give more-favorable terms to current customers if they have a strong banking history and good credit.

Compare loan terms and lenders

Be sure to compare the terms and conditions of any loans you consider to make an informed choice.

Further, the quality and reputation of lenders can differ. Search for a lender who’s transparent about loan terms and provides a customer service team to answer your questions.

Are you interested in a personal loan?

A personal loan can be both flexible and convenient. You can use the funds for personal expenses, to consolidate debt, or to pay for unexpected costs.

At Discover Personal Loans, you can design your loan around your financial situation. Pick the amount you need and the repayment term from options offered to fit your budget.

If you have questions about documents you might need or how you might use a personal loan, give us a call at 1-866-248-1255. You can talk with a knowledgeable U.S.-based loan specialist who will explain your options and help you complete your application.

To learn more about our quick and easy online process and to see what you need to apply, visit us here:

¹ https://www.pewresearch.org/short-reads/2023/06/30/self-employed-people-in-the-us-are-more-likely-than-other-workers-to-be-highly-satisfied-with-their-jobs/

²https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

³ https://www.irs.gov/faqs/small-business-self-employed-other-business/form-1099-nec-and-independent-contractors

⁴https://www.irs.gov/forms-pubs/about-form-1120

⁵ https://www.irs.gov/forms-pubs/about-form-1065

How to Apply for a Loan When You’re Self-Employed