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What to Know About Small Business Loans for the Self-Employed

Small Business | SouthEast Bank | October 31, 2022

As an independent contractor or self-employed person, you may be wondering if there are alternative options to loans to raise capital to either start or expand your business. After all, it seems like most small business loans are meant for larger companies with more than a few employees and not just a single person. Is it even possible for an independent contractor to get a business loan?   

The good news is that there are small business loans for self-employed or independent contractors if they are eligible. Self-employed small businesses are similar to standard business loans, and as long as you meet the requirements and are approved, they can help you significantly fund your venture. 

What Does it Mean to Be Self-Employed?

Before we explore what loans are available for self-employment, let’s look at what it means to be self-employed and how it impacts what type of loans you can apply for. 

What qualifies as a self-employed person differs based on who defines the term, but as the general definition, it means a person who earns a living by working for themselves. For example, the IRS considers you self-employed if you meet one of the following conditions:

  • You are in business for yourself 
  • You are a member of a partnership that carries on a trade or business
  • You carry on a trade or business as a sole proprietor or independent contractor

Being self-employed means, you run your own business and make money for yourself. That business, though, could be set up in different ways, such as a sole proprietorship, partners, or being the owner of an LLC. The loans you are qualified for will depend on your business entity type, so keep that in mind when creating your company. 

Self-Employed Business Entity Types


Independent Contractor

An independent contractor, also known as a freelancer, is defined by their tax bracket, a 1099 instead of the traditional W-2. Like other defined self-employed people, independent contractors are responsible for reporting their own wages and paying their income tax. 
They are often hired on a project basis or a certain amount of hours per month. They are not guaranteed a salary or any benefits provided by the company. Independent contractors earn money directly for themselves and not companies, making them self-employed.

Not all self-employed people are independent contractors, however. For example, if you create jewelry and sell it online, you are a small business owner as you work for yourself and no one else. 

Those who are independent contractors can qualify for small business loans for the self-employed, depending on how they plan to use their funds. 

Sole Proprietorships

As you start your business, you don’t legally have to declare yourself a business title but are automatically considered sole proprietor until the paperwork is filed to change the title to another role. Sole proprietors are any one person that owns and operates their business. They get all of the revenue that comes in, but their personal assets are at risk if the business fails. 

Any paperwork that is used for the business is filed under your legal name. You can register a different name for the business as a DBA, or Doing Business As, but any government forms or loan paperwork will be filed under your name. Unlike independent contractors, sole proprietors use tax forms 1040 and Schedule C. You also must pay self-employment taxes.

When applying for small business loans, lenders will look at your personal credit history and business history, so make sure you are in good financial standing. They may also be more careful to lend money to sole proprietorships unless you can prove you are making enough revenue to pay back the loan. 


Partnerships are businesses owned by two or more people, often co-owners or members. The most common type of partnership is a general partnership, where two or more people own the company and share profits and losses equally unless stated otherwise, similar to a sole proprietorship. 

Other types of partnerships are: 

  • Limited Partnerships - Partnerships with silent investors. The investors do not make any day-to-day decisions for the company, nor do they have any risk liability. Limited partnerships must be created under a state’s partnership law.
  • Limited Liability Partnership -  Each member is responsible only for their own actions and is often protected from the actions of other members.
  • LLC Partnership - Members cannot be sued for any of the business’s debts or actions, but they may be held liable for any other member’s actions. 

Partnerships have the most options when it comes to small business loans. They can either apply together, under the company or, if one of the members has a poor credit history, the other partner can be the sole borrower for the business. 

Types of Loans for Self-Employment 

A self-employed person is looking for small business loans similar to those who run larger businesses. Many of the options available to them are also available to you, including some SBA loans. Understanding what you want the loan for is important before applying to ensure you qualify for the type of loan.

Factoring Loans

Factoring loans allow you to use customers' outstanding customer invoices or money owed to you as collateral to get money from a lender. These approvals are often quick and helpful to small businesses needing cash-flow fast.

To qualify for a Factoring Loan:

  • You sell to other businesses
  • Your customers are creditworthy
  • You have limited bank financing
  • Sales should be $5,000 or more a month

SBA microloans

The SBA, or Small Business Administration, provides microloans to self-employed people. They often have lower interest rates and have terms of up to six years.

To qualify for an SBA microloan:

  • The lender determines microloan eligibility but typically requires collateral as well as a personal guarantee. 
  • It can be used for supplies, machinery, inventory, working capital, and fixtures.

Purchase Order Financing

If you need to buy supplies, purchase order financing is the best bet. With purchase order financing, a lender pays for what you need from the supplier, and then the customers will send their payment directly to the lender. Then, you will receive the remainder. 

To qualify for a purchase order financing loan: 

  • The borrower doesn’t make the products it sells but resells products from a supplier
  • Your customers are creditworthy
  • A supplier must be reputable with on-time deliveries 
  • Transactions can not be canceled
  • The borrower must have a good reputation and healthy financial background 

Merchant Cash Advance 

A merchant cash advance is different from a traditional bank loan, although it still comes from a lender. The lender will go through your credit card history and will analyze how much you need and how much you can pay them back. Once they do that, they will outline the amount you can get and the interest rates. Merchant cash advances are promising if you don’t have any collateral to put up against it and need money soon, as well as those with poor credit. Lenders might also offer you more flexible payment options during slower periods of transactions. They do come with higher interest rates and have shorter terms. 

To qualify for a merchant cash advance:

  • 4-6 months of bank statements, basic financial documents, and tax returns.
  • If you stay within 100-150% of your monthly revenue stream, you more than likely won’t need any collateral. However, some lenders may require it depending on your business.
  • No other current merchant cash advances. Lenders will only allow a business to have one merchant cash advance at a time.  

How to Get a Loan While Self-Employed

Applying for a self-employed loan is similar to a personal loan. You will need to compile the required documents and financial statements as requested by the lender and make sure you have a good credit score. The most important part of applying for any loan is making sure to do your research and pick the right lender. While some loans for the self-employed have shorter terms, others have longer terms, and you will be working directly with the lender for a while. 

Tips to Find the Right Loan:

  • Research all your lenders and loan options. Finding out what loans you qualify for is step number one before you apply for anything.
  • Make sure you meet all the minimum requirements for each loan. Take a look at what type of credit is needed, what businesses qualify, and if you need to put up any collateral. 
  • As you apply for the loan, ensure you upload the right documents for the lender. Applications often need a lot of financial background and revenue information. 
  • If your loan is accepted, carefully read through the contract. It may sound obvious, but you don’t want to sign something you don’t understand. If you have any questions about the contract, ask your lender to clarify. 

How Much Funding Can You Get with Small Business Loans?

Each type of loan has different limitations on what you can borrow based on your eligibility. Microloans, for example, allow borrowers up to $50,000 for startup costs, while with factoring loans, it depends on how much your unpaid invoices are worth. You can receive more funding if you have a high value of collateral. 

Other small business loans, such as SBA(7a) loans, allow self-employed workers up to $350,000. How much you can borrow will depend on what you are using the money for, what type of business you are in, and if you are in good financial standing. To understand how much you qualify for, speak to your local lender about the different options available to your small business. 

Alternatives to Small Business Loans for the Self-Employed

You may decide that traditional loans aren’t the way to go for your business after looking through the options or are unsure you’ll be able to find funding because of your financial history. There are alternatives to small business loans, however, which can still provide you with the capital you need, often with less strict requirements. 

Business Credit Cards - Like personal credit cards, business credit cards can help you buy everyday items and larger purchases within your approved limit. They will help you build up your business credit, which can help you get a business loan down the line if you so choose. Often credit cards come with an introductory 0% APR which will help you save money.

Term Loans - While still a loan, these loans give the borrower a lump sum and are repaid over a fixed term through predetermined payments. They tend to be more user-friendly and customizable, which is helpful for the busy self-employed.

Crowdfunding - Many self-employed entrepreneurs can use crowdfunding as a source to start their businesses or fund products. Crowdfunding is a good choice as you don’t have to pay back the money, but you do have to have a strong marketing campaign to have it be successful. 

Get a Small Business Loan for Your Self Employed Company

Self-employed businesses often do not have the same revenue as other types of businesses with more employees, which is why it’s often more difficult to find the right loan. With some research and the right lender, you can get the funding you need for your small business, whether it’s an SBA microloan or a merchant cash advance. SouthEast Bank can help you navigate the paperwork and terms to ensure you are applying for the right loans as a self-employed person. 

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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.

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