Generally speaking, when seeking loans for self employed people, lenders want to see documented income and employment. They also need to see solid credit records and be able to separate business expenses from personal ones.

Despite the hurdles, borrowers who are self-employed can get loans as long as they meet loan guidelines. This is especially true for mortgage loans where the borrower can document consistent cash flow from business deposits.

Small Business Administration (SBA) Loans

Small Business Administration (SBA) loans are a great financing option for anyone who works for self employed loans themselves, whether as a freelancer or contractor or as a small business owner. However, you must work with an approved SBA lender to qualify. The right lender can walk you through the different loan options and recommend the financial vehicle that best suits your needs.

The SBA offers various types of loans for business owners, including the Paycheck Protection Program (PPP). PPP is specifically designed to help self employed people who earn income through a sole proprietorship or independent contracting business. Thanks to a change in the loan amount calculation for Schedule C filers, freelancers and contractors can now use gross income rather than net when calculating their PPP maximum loan amounts.

Depending on the type of loan you are seeking, SBA lenders may ask for a pile of paperwork and financial information from both you and your business, including several years of tax returns, business financial statements, business plans, resumes, authorization for credit and background checks, previous loan applications and more. The process for obtaining an SBA loan can take quite a while and you will likely be working with your lender closely over the course of time that you are in need of the funds.

The SBA has offices in every U.S. state and also provides grants to counseling partners that provide services for small business owners, including approximately 900 Small Business Development Centers, 110 Women’s Business Centers and the SCORE volunteer mentoring network. The SBA also operates Lender Match, which allows you to fill out a brief application and be matched with a lender that can offer you quick cash.

IRS Definition of Self-Employed Persons

Self-employed individuals are those who work for themselves and do not have an employer that pays them a consistent salary or wage. People that are considered self-employed may include independent contractors, freelancers, traders/investors, attorneys, insurance agents and more. Essentially, anyone who makes their living through the performance of a trade or business and does not have an employer that withholds taxes is considered to be self-employed.

While working for yourself can offer a lot of freedom, schedule flexibility and uncapped income, it can also be very volatile. That’s why it’s important for those seeking a loan for self employed to have sufficient savings in case they experience a slow period or are forced out of business.

For mortgages, lenders will use a different method for calculating qualifying income for borrowers that are self-employed. Rather than using gross income, they will use net income which includes taxable profit minus all expenses related to the business.

A lender will also review the stability of your business and may ask for two years of tax returns to verify that your income has been stable over time. This is particularly true for those whose industry could be subject to a downturn such as a hotel owner during the coronavirus pandemic or builders during a recession. They will want to make sure you can continue making your monthly payments in the event of a decline in earnings.

FHA Mortgages

The good news is that most mortgage programs available to salaried and hourly wage workers are also available to self employed borrowers. These include conforming (backed by Fannie Mae and Freddie Mac) loans as well as government-backed FHA, VA and USDA loans. However, the approval process is slightly more rigorous for those who work for themselves. This is largely because underwriters review a borrower’s income in the context of existing debts, a practice known as debt-to-income (DTI).

A typical lender will want to see the past two years of tax returns and profit and loss (P&L) statements to verify your earnings. Lenders may also look at your business history to make sure that it has been around for a sufficient amount of time and has shown a consistent level of growth. In addition, some lenders might ask you to submit a letter from your accountant verifying that certain deductions (like depreciation) are not being used to reduce your qualifying taxable income.

While this scrutiny may seem overwhelming, it is necessary to ensure that you can qualify for a loan with the most competitive terms. It is also a good idea to shop around for rates as lending guidelines and requirements vary from lender to lender. Some mortgage companies specialize in working with self employed borrowers and may offer more flexible underwriting standards.

Personal Business Loans

In some cases, personal business loans may be an option for self employed individuals seeking financing. These loans are typically secured by your personal credit and often have lower requirements than traditional business loans. However, it is important to remember that you are not allowed to use a personal business loan for personal expenses. For example, you cannot take out a personal business loan to buy a new phone that you will also use for business purposes.

Whether you’re a seasoned entrepreneur in a cash crunch or an independent contractor looking to get your business off the ground, the right type of financing is essential for your success. Understanding the differences between a business loan and a personal business loan can help you determine which is right for your needs.

Lenders are looking for stability in a borrower’s income when they evaluate loan applications. Typically, this means that the lender will require proof of income in the form of pay stubs or W2s. However, self-employed people don’t receive regular paychecks, making it more challenging to demonstrate their income stability to lenders.