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If you are self-employed and need financial assistance, you may qualify for a loan from the US Small Business Administration (SBA). These loans can provide much-needed funds at competitive interest rates, but you’ll need to meet eligibility criteria set by the SBA and its network of individual lenders.
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Who qualifies as self-employed?
The IRS defines someone as self-employed if they are a sole proprietor or an independent contractor carrying on a trade or business. Likewise, a member of a partnership or someone who is otherwise in business for themselves is considered self-employed under IRS guidelines. This also includes part-time businesses. Since LLC members are generally taxed as sole proprietors, LLC owners are also considered self-employed.
Although the SBA does not define the term self-employed, it restricts its loan programs to small businesses. What constitutes a small business is an industry-specific determination, but small businesses generally must have fewer than 1,500 employees.
SBA loans available for the self-employed
Eligible self-employed people can benefit from several types of SBA loans. In general, SBA loan rates are competitive and come with lower down payments than other business loans. Some of the more popular options include:
SBA microloans are available through a nationwide network of government-backed nonprofit lending organizations. Microloans can be used for a variety of purposes aimed at rebuilding, reopening, repairing, improving or improving a small business. Approved expenditures include working capital, inventory or supplies, furniture, fixtures, machinery and equipment.
The maximum amount you can borrow through an SBA microloan is $50,000 and the maximum repayment period is six years. SBA microloan interest rates range from 8% to 13% as of August 2022.
Since the microcredit program is administered by a network of intermediary lenders, eligibility requirements vary. In general, however, business owner applicants must provide security and personally guarantee the loan in addition to demonstrating their qualifications.
SBA 7(a) Small Loans
The SBA 7(a) loan program is the SBA’s flagship and most popular loan program. Funds are available up to $5 million and can be used for a variety of purposes, including working capital, purchasing equipment, and business expansion costs. Business owners can even use the proceeds to finance the purchase of real estate.
The interest rate on an SBA 7(a) loan is pegged to a base rate (prime, LIBOR, or an optional anchor rate) plus 2.25% to 4.75%, depending on the amount and term of the loan. ready. Loan terms extend up to 15 years for real estate and 10 years for equipment, working capital and inventory loans.
Eligible borrowers must operate for profit in the United States or its territories and demonstrate that they have reasonable equity to invest. As with other SBA loans, it is also necessary to use other sources of funding (such as personal assets) before applying for the government guaranteed loan.
SBA Express Loans
SBA Express loans fall under the 7(a) program and are available for up to $500,000, with a maximum SBA guarantee of 50%. Interest rates are ultimately negotiated by individual lenders and borrowers, but cannot exceed the SBA maximum prime rate plus 6.5%. Repayment periods extend up to seven years for lines of credit, 25 years for real estate and 10 years for other loans.
Express Loans are a great choice for self-employed applicants who need quick access to cash, as the SBA responds to Express Loan requests within 36 hours of receiving them. This is significantly faster than the five to 10 business days it takes for small 7(a) loans.
Credit and eligibility decisions are made by individual lenders, so requirements vary. However, borrowers must meet the lender’s credit rating, minimum time in business, and annual income requirements.
How to apply for an SBA loan as a freelancer
The process for applying for an SBA loan as a self-employed person varies by loan program and individual lender. However, there are some general steps to follow when applying for an SBA loan:
- Check your credit score. Before applying for an SBA loan, check your personal FICO score and review a credit report from at least one of the major credit bureaus – Equifax, Experian, and TransUnion. SBA loans generally require a credit score of at least 680, but lenders impose their own requirements. Understanding your credit profile can help you gauge your chances of approval and give you a chance to improve your score before you submit an application.
- Write a business plan. To qualify for a business loan, you will need to create a business plan that demonstrates how your business makes money and how it will use the loan proceeds. This is especially important if you have been in business for less than two years.
- Determine the type of SBA loan you need. Visit the SBA website to view available loan programs. Choose an option with a borrowing limit and approval time that suits your needs. Also review any program-specific requirements to make sure you qualify.
- Select a lending partner. Enter your postal code on the SBA Lender Match tool to locate a lender in your area. Familiarize yourself with the lending partner’s credit and income requirements and the application process to confirm your eligibility.
- Identify sufficient safeguards. Depending on the SBA program and the lender, collateral may be required to secure the loan. Compare lenders and programs to determine collateral requirements and consider these when choosing a loan offer.
- Gather the necessary documentation. The SBA loan application process varies by lender, but applicants are generally required to provide documents such as tax returns, business financial statements, projections, and outstanding debts. Streamline the process by compiling these documents before submitting an application.
- Submit an application. Once you have identified an SBA lending partner and lending program, submit a formal application. A loan officer will contact you by phone or email if additional information or documentation is needed. Keep an eye on these communications to avoid delays in loan processing and approval.
Ways to Use SBA Loan Funds
There are several ways to use SBA loan funds to help your business, but permitted uses may be restricted by the specific loan program. Some common uses of SBA loans include:
- Purchase of inventory or equipment
- Pay for renovations or repairs
- Hiring new employees
- Pay marketing or advertising costs
- Develop your business operations
- Buy a new commercial space
Are SBA loans hard to get?
It’s not difficult to qualify for an SBA loan, but the application, approval, and funding processes can be lengthy. This means that self-employed business owners who need quick access to cash may be best served by an online loan, business credit card, or other alternative.
SBA lending requirements vary by lending program and individual SBA-approved lenders. However, the SBA imposes some basic eligibility guidelines that all applicants must meet as part of the application process. For example, a company must demonstrate that it is able to repay its loan.
Here are the basic eligibility requirements for a business to obtain an SBA loan:
- Must operate for profit in the United States or one of its territories
- The owner must have already committed their time and money to the business
- Must have exhausted all other financing options
Alternatives to SBA Loans
If you are not approved for a loan, you may still be able to obtain financing from other sources. SBA loan alternatives often come with higher interest rates or less favorable terms, but they may be easier to obtain.
Consider these options if an SBA loan isn’t right for your business.
Independent business owners can use some personal loans to cover start-up or operating expenses or apply for business loans. Although these loans are available from banks and lenders, it can be difficult to qualify with a traditional financial institution, and the rates and terms are often less competitive than with online options.
Expect to pay between 4% and 36% annual percentage rate (APR) for an online personal loan with terms up to seven years. As always, compare personal loans and the best small business loans before deciding on one and prequalify if possible.
Business credit cards
Business credit cards are easier to obtain than SBA loans and offer much faster approval speeds, with consumers often receiving a same-day or even immediate decision. This approach to business financing can also help you build your credit history and make it easier to get approved for future loans.
Although credit cards can be a convenient way to pay for small expenses, they usually have high interest rates (around 9% to 27%), so look for one that offers a 0% introductory period. .
If you have money in a savings account, consider using some of it to fund your business. We don’t recommend taking money out of retirement accounts or emergency funds, but using cash can be a good option if you don’t have good credit or have trouble getting loan approval.
Independent business owners who need access to large sums of money can also opt for equity financing. It involves selling part of your business in exchange for funding. However, this option can be risky as it may involve handing over the decision-making to someone outside of your organization. For this reason, it should only be considered as a last resort, and you should always have a business attorney review the terms of the agreement.
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