July 8, 2022 By Max Freedman

Working as an independent contractor or self-employed person has its benefits, but it also comes with some financial uncertainty. Your earning potential could be greater, or it could be not guaranteed at all. As a result, it’s not uncommon for contractors and self-employed people to have reduced income when work is light. Financial assistance can help.

Apply for an SBA Loan

Just as many businesses will resort to loans for growth or recovery, independent contractor loans can help in much the same way. These loans can provide extra funds for sudden expenses or any increasing costs of your work as a sole proprietor. Below is an overview of several independent contractor loan types to help you pick one that fits your financial situation.

What is an independent contractor?

Independent contractors are employees whom businesses hire to temporarily provide a product or service. Some of these temporary arrangements become permanent without the contractor becoming a full-time employee.

Contractors are generally paid either a flat rate or by the hour. While contractor earning potential can be higher, contractors must pay self-employment taxes and take out their own health insurance.

Something else to consider is the difference between a contract worker and a self-employed individual. While these concepts are similar, you might have different financing options depending on which term describes you.

Generally, self-employment is a blanket term for anyone who earns money without being an employee for someone else. An example would be owning and running your own ecommerce store. On the other hand, an independent contractor provides services to one or several clients. Journalists who write for multiple publications are a common example.

How to get a loan as an independent contractor

While the application process for independent contractor loans isn’t complicated, qualifying for loans isn’t a sure thing. Below are several steps you can take to pick the best loan.

1. Choose your loan type

Common independent contractor loan types include:

  • SBA 7(a) loans. The Small Business Administration (SBA) provides some of the most well-regarded loan plans. The agency doesn’t provide the funding itself – it financially backs certain banks, which can then offer more flexible loan terms. SBA 7(a) loans in particular are highly sought-after due to their large loan amounts, long repayment periods, and low interest rates. However, SBA 7(a) loans often have more stringent qualification criteria – and a longer application process – than other loans. You can check if you pre-qualify with SmartBiz*.
  • SBA Express loans. Where most SBA loans can take months to process, SBA Express Loans are often available within 36 hours. These loans are available to businesses with fewer than 20 people. You can receive up to $500,000 as a line of credit or as an installment loan.
  • SBA Export Working Capital Program (EWCP). EWCP loans offer small business owners the chance to access more traditional financing options for which they might not otherwise qualify. Through this program, you can borrow up to $5 million as a credit enhancement to improve your eligibility for high-value loans.
  • Bank term loans. Bank term loans are another financing option that small businesses commonly seek. Like SBA loans, they provide some of the highest loan amounts paired with the lowest interest rates and most generous repayment periods.
  • Alternative online lenders. Most online lenders offer small business loans with rates much higher than with traditional lenders. However, they can be decent financing options for borrowers with bad credit histories thanks to their more flexible prerequisites.

2. Know the eligibility requirements

The eligibility criteria for the above loans are listed below.

  • SBA 7(a) loans
    • Minimum credit score of 680
    • Minimum two years of business experience
    • Ability to put up collateral
    • Current on government-related loans
    • No recent settlements or charge-offs
    • No outstanding tax liens
    • No foreclosures or bankruptcies in the last three years
    • Must do business in the U.S. or a U.S. territory
  • SBA Express loans
    • Minimum credit score of 680
    • Minimum one year of business experience
    • Business with 20 or fewer employees
  • SBA Export Working Capital Program (EWCP)
    • A minimum credit score of 680
    • Export-related services available or in development
  • Bank term loans
    • Sufficient cash flow to support repayment
    • A minimum personal credit score of 660
    • Minimum two years in business
  • Alternative online lenders
    • Eligibility criteria may vary significantly between online lenders. However, their terms and conditions can usually accommodate most financial situations.
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3. Look at the loan amounts and repayment terms

The above loans have the below loan amounts and repayment periods.

  • SBA 7(a) loans
    • Loan amount: $30,000 to $5,000,000
    • Repayment term: 10 to 25 years
  • SBA Express loans
    • Loan amount: Up to $500,000
    • Repayment term: Up to seven years if your loan is a line of credit. 10 to 25 years otherwise.
  • SBA Export Working Capital Program (EWCP)
    • Loan amount: Up to $5 million
    • Repayment term: One to three years
  • Bank term loans
    • Loan Amount: $30,000 to $500,000
    • Repayment term: Two to five years for short-term loans; at least 10 years for long-term loans
  • Alternative online lenders
    • Varies significantly by lender, though typically, loan amounts max out in the low hundreds of thousands, and repayment terms are short.

4. Gather your documents and apply

Paperwork is one of the most important things you’ll need before applying for whichever loan you choose. While not every lender will require the same forms, it’s best to have a copy of all potentially necessary documents on hand.

Additionally, since independent contractors may be considered businesses during the lending process, you might need more documentation than is necessary for personal loans. You may need to provide your business registration documents, proof of identity, bank statements, tax returns, loan history, and more.

A business plan can also be key to qualifying for a loan. Showing lenders that you have a clear vision and a path to get there helps build confidence that you’re a low-risk borrower.

Common financial struggles that independent contractors face

Independent contractors may endure challenging financial situations due to their unique positions within the working world. As a result, there are plenty of reasons they may seek financial assistance at some point. Below are a few of the struggles you might face as a contractor.

Your income might fluctuate

Although companies may hire you to provide a service, you're your own boss at the end of the day. That can have its advantages and disadvantages. For one, you have direct control over how much work you take on and greater negotiating power over what you’re paid. But that independence can come at the cost of financial stability.

As an independent contractor, you rely on a steady stream of clients and projects for a sufficient monthly income. It can be tough to predict how many of each you’ll get within any given pay period. That can make it tough to discern how much money you’ll have at your disposal. In addition, there are no employee protections for contractors. If a client suddenly decides to drop you from the project, you might lack legal recourse to get compensated for your time.

You have to cover your own expenses

In a typical employment situation, the employer covers key business expenses such as software subscriptions and travel. The employer also deducts FICA taxes from an employee’s paychecks. However, as an independent contractor, all those expenses fall to you. You’ll need to consider the cost of equipment, repairs, and taxes when calculating your profits. This need can catch some newer contractors off-guard. However, because these expenses are business-related, you can often deduct them from your taxable income.

You don't have employee benefits

One of the main advantages of a steady job that some self-employed workers may take for granted is the benefits. Health insurance plans, retirement funds, and pensions all go away once you resolve to work for yourself. If you want those benefits to continue, you’ll have to pay for them yourself, which can quickly get expensive.

Parting Advice

If you’re an independent contractor who needs a loan, options are available. Many of the best loans require a good personal credit score, but there are financing options that can accommodate virtually anyone. Just keep in mind that any money you borrow will need to be repaid, and plan accordingly.

A great starting point for an influx of cash is an SBA loan. SmartBiz® streamlines the application process and lets you know ahead of time if you don’t qualify. In that case, bank term loans and custom financing are also available. Check whether you pre-qualify now to get yourself one step closer to the independent contractor loans you need.*

See if you pre-qualify