Loans for independent contractors can vary between unsecured or secured personal loans, payday loans, business loans, lines of credit, debt consolidation loans options, and more!
Being an independent contractor comes with its perks, including flexibility. However, many contractors will attest that contract work can feel like running your own business with its different expenses and costs. In fact, in many cases, the structure and setup can mimic a small business. And just like a small business owner, an independent contractor may not have things like benefits and or steady income. Because of this, you may need external help from time to time. The good news is that there are several loan options for independent contractors, some of which are unique to this type of employment.
Below you will find more information on loans for independent contractors that can help you pay for all kinds of expenses or tide you over until you receive your current project’s pay! Along with that, learn more about qualifications and loan requirements for 1099 employees.
A General Overview of What an Independent Contractor Is
When running a business, employees can consist of either:
- Full-time or part-time employees — generally, full-time employees work at least 35 hours a week, while part-time employees work less than that. Both types of work usually have benefits like healthcare, paid vacation, paid time off, a guaranteed income, and more.
- Independent contractors are not employees and are usually hired for a specific project or task. They are either paid a lump sum for their services or may need to log hours for ongoing work. Unlike employees, contract workers don’t usually have employee benefits and may not have steady work.
When hired, full-time and part-time employees have to fill out and submit a W-2 form—which means that taxes will be taken out of their paychecks. While independent contractors will fill out and submit 1099s—which does not automatically take out taxes—making the contractor responsible for paying them on their own. This is why you’ll sometimes hear contract workers being referred to as 1099 employees.
Are Self-Employed Individuals the Same Thing as Contractors?
Independent contractors are self-employed individuals, which means that they work for themselves for multiple clients/companies or businesses. Simply put, an independent contractor is one way to be self-employed.
Does My Work Qualify as Self-Employment/Contract Work?
If you do any work after being hired by a company, business, or individual, without a employee contract (full-time or part-time) you qualify as a contract worker. Contract work can be long-term or short-term and are available in all kinds of trades and skill-sets. Here are a few examples of work options:
- Construction and renovation work
- Graphic design
- Writing and editing
- Finance and accounting
- Tech work — management, coding, languages, etc.
- Visual and different forms of art
- Attorney and paralegal services
These are just a few examples of the kind of work contractors do. As long as you aren’t getting a standard employment contract with a company/business, or individual, you can qualify as a contractor or a self-employed person.
Proving Income as a Contractor/ Self-Employed Worker
When applying for any loan option, self-employed workers will have to prove self-employment income. Doing so can be a bit more complicated, but knowing your proof of income options will help! Here are some of the documents you can use:
- Employment verification letters from your current employer
- Contracts and agreements
- Bank statements and pay stubs
- 1099 tax forms
Keep in mind that you will see your gross income with most invoices as an independent contractor, while lenders may ask for income after taxes are taken out.
Understanding Credit Scores as an Independent Contractor
When self-employed, you may have established business credit, or you may be working on separating your personal credit with the process of transitioning to a “limited liability corporation” or “LLC”. Most independent contractors fall under the business model of “sole proprietorship,” which is one of the many scenarios which means their business credit is linked to their personal credit.
How to Get a Loan With Bad Credit When Self-Employed?
Even if you have a bad credit score or bad credit history, you may still be able to get a loan to take care of your expenses. Subprime loans options include secured loans and lines of credit and even some unsecured loan options—you can find more information on those options below.
What is Considered Bad Credit With Independent Contractor Loans?
Bad credit for an independent contractor will be the same as any other consumer and be scored from the three major credit bureaus—Equifax, Experian, and Transunion. Bad credit is usually any number below 580. To get a better idea of the credit score ranges, here is an outline of the different scores and where they fall on a scale between excellent and poor:
- Excellent: 850 to 800
- Very Good: 799 to 740
- Good: 739 to 670
- Fair: 669 to 580
- Poor: 579 to 300
Many factors go into a credit score algorithm. If you are trying to improve your score, it is essential to understand them, so you can do things like change your spending habits or realign financial priorities.
Now that you have a clear idea of what an independent contractor does, whether you fall into that category, and more information about basic application requirements, you can begin the process of starting your loan search. Below are some loan options you can look into as an independent contractor:
Consider Business Loans and Lines of Credit from The SBA (Small Business Administration)
Although many private lenders offer business loans and lines of credit, starting with the Small Business Administration (SBA), a federal agency, may be the most helpful.
Basic Eligibility Requirements for a SBA Loan
SBA loans can be available for all sorts of incomes and workers. The basic requirements of these loans include operation as a sole proprietorship (which most contractors are), operating for-profit, and that you do business within the United States.
How Much Can You Borrow With a Small Business Loan / SBA Loan?
There are all kinds of SBA loans, and the amount you can borrow depends on the loan type, your income, your credit score, and your ability to pay back your loan funds. SBA loans range from thousands to hundreds of thousands of dollars; however, you never have to borrow more than you need, regardless of how much you qualify for.
Different Types of SBA Loans
Here are some of the primary loan types you will find when researching SBA loan options:
SBA Backed Loans
SBA-backed loans work by matching applicants with lending partners that the administration has decided to work with. Before getting to an application, the process involves answering a few questions, getting matched with potential lenders, comparing loan terms such as loan amount, interest rates, fees, etc.
From here, you can fill out an application with a lender of your choice. Because each lender may be a little different, the loan application itself may vary.
Keep in mind that most business lenders will ask about things like your business plans, the amount of money you need and why you need, your credit score, financial projections, collateral, and your experience in your industry.
Paycheck Protection Program (PPP) Loans Forgiveness for Independent Contractors and Self-Employed People
PPP loans were issued during the pandemic by lenders that are backed by the SBA. Their purpose was to incentivize small businesses to keep employees on payroll. If they spend the money correctly according to the guidelines, the total amount borrowed will be forgiven. PPP loans were available for independent contractors, and although PPP loans are no longer available, PPP loan forgiveness is still ongoing.
Eligibility Requirements for PPP Loan Forgiveness for an Independent Contractor?
The eligibility requirements for PPP loan forgiveness are a little more complicated for self-employed borrowers vs. small businesses. To qualify for loan forgiveness as a contract worker, you must:
- Have used the funds within the covered period (usually 8 weeks or 24 weeks long)
- Have used your loan for compensation replacement—for self-employed workers, this could have been 100% of the loan. Self-employed business owners also don’t have to worry about things like salary maintenance.
- You must use the money within eligible spending categories. As an independent contractor, the only categories to avoid are health insurance and retirement. Self-employed workers will not receive forgiveness if they use their PPP loan for retirement benefits or health insurance premiums.
How to Apply for PPP Loan Forgiveness?
Your PPP loan lender will work with you to file for PPP loan forgiveness. Timing is essential when filing for forgiveness—you have to submit this application within 10 months of the end of your covered period to be considered for forgiveness. There are going to be a few forms involved; here are some documents to look into:
- An Official PPP Loan Forgiveness Application form
- DBA Form 350 EZ or SBA Form 3508S
- 2019 Schedule C
Your lender will walk you through the rest of the process, review your documents and get back to you within 60 days. Once the SBA process your application, you will get a breakdown of your forgiveness amount if you are approved for any.
How Much of a Loan for Independent Contractors Can Be Forgiven?
The maximum PPP loan forgiveness amount for independent contractors is $100,000.
SBA COVID-19 Relief Programs
COVID-19 continues to impact all kinds of industries, and depending on the contract work you do, you may be eligible for one or more COVID-19 relief programs from the SBA. Economic Injury Disaster Loan or EIDL loans, Shuttered Venues Grant, SBA debt Relief, and PPP forgiveness, as mentioned above, are a few programs. In some cases, these programs may be loans, or grants—which you don’t have to pay back.
Other Contractor Loan Options
If business loan options or small business loans/ SBA loans are not the right options for you, the good news is that there are other loans available. You can find these loans at a bank, credit union, or private lender; here are a few options to consider:
A 1099 Income Independent Contractor Loan
1099 loans help self-employed individuals who are looking to secure a mortgage. They are often much more flexible with income requirements than traditional mortgage options.
A Personal Loan for Business Expenses
A personal loan is usually an unsecured loan option that borrowers repay in monthly installments. You can use funds from these loans for all kinds of business expenses or personal expenses. Interest rates can be competitive, and loan terms and loan amounts will be based on your credit scores and income. The good news is that you can secure one of these loans even with bad credit. Monthly payments will vary depending on your loan period, lender, and loan amount.
A Payday Loan for a Self-Employed Individual
A payday loan is a short-term loan option (about a few weeks). Although they can help you meet financial obligations, even with bad credit, the interest payments will be extremely high! High interest coupled with many finance charges; payday loans can mean a cycle of debt. And so, you can consider a payday loan when self-employed, but it may not be the smartest choice.
Credit Cards as an Alternative to an Independent Contractor Loan
Credit cards are a form of revolving credit that borrowers can use for all kinds of business or personal expenses. Loan amounts can range from a few hundred dollars to thousands. However, you will need to have good to excellent credit to qualify and being irresponsible with them can have catastrophic consequences for your finances.
Cash Advance Loans for the Self-Employed Worker
Cash advances can be in the form of a private online cash advance loan or through a credit card. Although cash advances may seem like a great option, the interest rates for these loan options are pretty high!
Title Loans for Independent Contractors and Self-Employed Workers with Small Businesses
Title loans are one type of secured loan that uses a borrower’s vehicle as collateral. The loan amount will be based on the value of your vehicle, income, and ability to repay the loan. With these loans, you can have bad credit, and funding is usually fast. However, like payday loans, title loans can come with extremely high interest and tons of finances. And so, they should be a last resort option during an emergency.
The Bottom Line for Loans for 1099 Workers
Contract workers/self-employed workers have several loan options they can choose from! There are private business loans, SBA loans, personal loans, payday loans, title loans, credit cards, etc. The application process will depend largely on the lender when applying for SBA loans or other business loans. Remember that business loans will require more detailed information than your standard loan. Standard loans are some of the most accessible loans to apply for, and when you are dealing with an emergency expense, they may be the best option.