Did you know that approximately 10 percent of the workforce in the United States is self-employed? That equates to just under 15 million individuals.
While the self-employed workforce is growing, there are still several challenges that you must overcome if you are part of this group.
One issue is securing personal loans for self-employed individuals. Unfortunately, this can be tricky because of the documentation required.
If you need a loan, and you are self-employed, you are in the right place. Here you can learn more about what you need to do and prove to secure the funding you need.
Loans for Self-Employed Individuals: Getting Started
The first step in getting a loan is to prepare. The fact is, you can receive an unsecured (or secured) personal loan regardless of your current employment status. You can then use these funds for debt consolidation, starting a business, emergencies and more.
The key to successfully applying and getting the funding you need is to prepare. In some cases, as an independent contractor or another self-employed individual, you may have to provide additional paperwork to verify your income.
If you have a top-notch credit score, you may be able to qualify for a personal loan based on your strong financial history. However, if your rating isn’t as great, you may need to compensate by proving your income.
Financial Documents Needed if You are Self-Employed
If you are applying for a loan, then you may have to provide the lender with specific financial documents. For example, rather than bank statements, your lender may require a copy of your tax return. In some cases, they may require several years of tax returns.
If you choose an unsecured loan, it won’t require any type of collateral or down payment. This is why bank statements and appraisals aren’t required.
Keep in mind, if you have great credit and strong earnings, you will receive the best loan terms.
A bank statement isn’t required for a self-employed personal loan. These loans are not secured home loans that are issued by mortgage companies or small business loans that are underwritten by larger commercial bankers.
You don’t have to worry about providing any type of evidence of your assets, cash flow or even prove that your down payment money is legitimate.
In most cases, using a specialty lender for a self-employed personal loan will be best. When you do this, you can expect to be asked for the following information:
- Purpose of the loan
- Your credit score range
- Address/phone number
- Date of birth
- Driver license number
- Social security number
- Monthly income amount
- Your checking account information including routing numbers
You need to have this information on-hand when you apply in person, or if you apply online, be prepared to fax or email it to the lender.
In most cases, to receive a self-employed personal loan, you will need to provide two years of signed tax returns. If you have an excellent credit score or a spouse who is working, you may be able to provide less documentation.
You will need to submit a Schedule SE and C, as well as your 1099-MISC forms if needed.
The Schedule C
The Schedule C is the statement of profit or loss from your business. Single member LLCs and sole proprietorships file this document on their returns.
The Schedule C helps a lender establish the total amount of cash flow the solo operation generates after paying all expenses. All 1099-MISC income is listed on this document, too.
The Form 1099-MISC
According to rules from the IRS, if you have received a payment of more than $600 from a single person or entity, or given a payment of more than $600 to a payment or entity, then you must file the 1099-MISC. These are typically issued for:
- Providers of a legal service (i.e. lawyers or attorneys)
- Supplier of medical or health services
- Any services performed by an independent contractor
Knowing what documents you have to have and why they are needed is a crucial part of applying for a self-employed personal loan.
The Schedule SE
Any legitimate personal loan company will also require you to provide a Schedule SE – self-employment tax form. As a self-employed individual, you are required to pay the full amount of Medicare and Social Security taxes and this document must be included when filing your taxes.
By including the Schedule SE, you can help the lender verify that you have paid all of your payroll taxes. It also reduces the risk of an audit or tax lean, which could affect your ability to repay the loan.
How to Acquire a Personal Loan Without Financial Documentation
Attempting to obtain a personal loan without financial documentation is a common issue if you are self-employed. While you may need funds, if you are relatively new or starting your business, you may not have the needed paperwork.
Without Proof of Income
If you don’t have proof of income (i.e. no tax returns), you may find it difficult to obtain the funding needed. Lenders look at two primary things when underwriting your application – your DTI ratio and your risk rating, which relates directly to your credit score.
If you perform well on each metric, you can borrow more money with great terms. However, if you don’t have proof of income, you need to rank well on one of the following, or accept smaller amounts:
- An acceptable DTI ratio
- A high credit score
When you rank well with one of these factors, you may still be able to receive a self-employed personal loan. However, this will vary based on the lender you choose.
Self-Employed Loans: Challenging but not Impossible
As you can see from the information here, loans for self-employed individuals are not impossible to obtain, but they can be challenging.
Making sure you are prepared and knowing what you need to qualify can help you have a better chance of getting the funding you need.
If you are interested in learning about various personal loans available, or in finding more resources to improve your finances, visit our blog.