Self employment has a host of advantages. Your work days are more flexible, you have more control over what you do, and you can employ certain tax-efficient tools to cut down on your tax bill. However, everything has its downsides, and self employment is no exception. Obtaining loans is one particularly frustrating downside that all freelancers and contractors are well acquainted with.
Although certainly difficult, it is possible to get self employed loans. There are a variety of options available to freelancers and contractors, ranging from personal loans to short-term cash advances. In this article, we will discuss what finance options are available to self employed workers, how they can help you, and how you can obtain them. Let’s get started.
Is it possible to get a loan while self employed?
The short answer is it is entirely possible to take out a loan if you are self employed. The long answer is it is generally harder to do so than if you were in salaried employment. While this can be down to several reasons, the main reason behind this increased difficulty is the perception of risk.
Lenders will often perceive self employed contractors and freelancers as a risky prospect. This is largely due to their requirement for borrowers to prove a stable income, typically over a two-year period. This can be difficult when self employed, as income can easily fluctuate as contracts are completed and new clients are sourced. However, some lenders will still be willing to work with contractors and freelancers even if they don’t meet this requirement.
Lenders willing to overlook the two-year proof of income requirement will usually want to see some other documented evidence of your financial position. Bank statements are often requested, as they show lenders whether you have enough money coming in to keep up with monthly repayments. Alternatively, lenders might want security, either in the form of physical assets of sufficient value or the guarantee of another individual. If you can provide either of these two alternative requirements, then obtaining a loan while self employed will be relatively easy, though it will need you to jump through a few extra hoops.
Personal loans for self employment
If you have worked in a self employed capacity for at least two years, or can satisfy other requirements set by lenders, it will be possible for you to take out a loan. Personal loans are one of the options commonly used by self employed contractors and freelancers. They are unsecured loans, meaning that they generally don’t require any form of security, provided you can prove yourself capable of making repayments. If you need a quick financial solution, personal loans could be a good first port of call.
While a helpful first option, personal loans are typically quite small, seldom exceeding £50,000. Although it is possible to find lenders willing to lend in excess of £100,000, this is quite uncommon. Personal loans also have comparatively high interest rates, with the average floating around the 16.00% mark. This can make repaying a personal loan somewhat expensive, especially if you can’t pay it back quickly. For these reasons, personal loans are best used for small endeavours and when you can make a full repayment quickly.
Alternatives to personal loans for self employment
Personal loans can certainly help in a pinch, but they do have their downsides. As such, some self employed contractors and freelancers may prefer to use alternative forms of finance. Thankfully, there are quite a few available, even if you aren’t on a salary.
Cash advances
Cash advances are a commonly used alternative to personal loans. They are quite similar to a personal loan, sharing many of the same qualities. Cash advances are short-term, fairly low in value, and flexible. However, they also share some of the same downsides, such as a relatively high interest rate.
Taking out a cash advance can be done using a credit card. Essentially, you tap the credit card to raise the cash you need, and make repayments later. Naturally, this makes cash advances very fast and flexible, but it also means they are usually quite low in terms of value. As such, they are best used as a small cash supply for when you need a quick injection for immediate use.
Home equity line of credit
Home equity lines of credit, or HELOCs, are loans that use the equity in your home as security. This makes them more risky than the other loans we have mentioned so far, but greatly increases the amount of money you can raise at a time. This makes them a good pick for when you need larger sums of money that other methods cannot handle.
In essence, a HELOC works as a pool of credit that can be drawn from as much or as little as you like. Repayments will only be required for the amount of money you borrow, meaning there aren’t any additional charges if you don’t use the service for a few months. As such, a HELOC can be a great solution if you need a flexible form of finance.
Credit card loan
Credit card loans are a reliable method of raising finance, and can be of use to contractors and freelancers, too. They can be used to cover a wide range of personal expenses, and, if required, business expenses as well. The specifics of each loan depend on the credit card in question; some have a low draw limit, while others have a high interest rate. In general, the better your credit rating, the better the credit card you can obtain, which in turn increases its applications. If you need a reliable yet flexible form of finance, taking out a credit card could be a good option.
Wrapping up
There are a range of self employed loans available to contractors and freelancers. Some offer a short-term boost to personal finances, while others are capable of raising a much larger amount over a longer period. However, each option has its pros and cons, meaning some will be better for your situation than others. As such, it is a good idea to consult a financial professional for advice before taking action.