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If you are self-employed and need financial assistance, you may qualify for a US Small Business Administration (SBA) loan. These loans can provide much-needed funds at competitive interest rates, but you must meet eligibility requirements set by the SBA and its network of individual lenders.
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$5,000 to $250,000
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$5,000 to $500,000
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Who is considered self-employed?
The IRS defines someone as self-employed if they are a sole proprietor or an independent contractor conducting a trade or business. Likewise, a member of a partnership or someone who is otherwise self-employed is also considered self-employed under IRS guidelines. This also includes part-time businesses. Because LLC members are typically taxed as sole traders, LLC owners are also considered self-employed.
While the SBA does not define the term self-employed, it reserves its loan programs for small businesses. What constitutes a small business is an industry-specific determination, but small businesses are generally required to have fewer than 1,500 employees.
SBA loans available for self employed
Eligible self-employed individuals may qualify for 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 most popular options are:
SBA microloans are available through a nationwide network of government-backed nonprofit lending organizations. Microcredit can be used for a variety of purposes aimed at rebuilding, reopening, repairing, upgrading or improving a small business. Approved expenses include working capital, inventory or consumables, 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.
Because the microcredit program is managed by a network of intermediary lenders, eligibility requirements vary. In principle, entrepreneur applicants must, in addition to proof of their qualifications, provide collateral and personally vouch for the loan.
SBA 7(a) Small Loans
The SBA 7(a) loan program is the flagship – and most popular – loan program of the SBA. Funds of up to $5 million are available to be used for a variety of purposes including working capital, equipment purchases and the cost of expanding a business. Entrepreneurs can even use the proceeds to finance the purchase of real estate.
The interest rate on an SBA 7(a) loan is tied to a base rate — Prime, LIBOR, or an optional peg rate — plus 2.25% to 4.75%, depending on the loan amount and term. Loan terms are up to 15 years for real estate and 10 years for equipment, working capital and inventory loans.
Qualifying borrowers must be operating profitably in the United States or its territories and demonstrate that they have adequate equity to invest. As with other SBA loans, it is necessary to use alternative sources of funding (e.g. private wealth) before applying for the government-backed loan.
SBA Express Loan
SBA Express Loans fall under the 7(a) program umbrella and are available 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 of Prime plus 6.5%. The repayment periods are up to seven years for lines of credit, 25 years for real estate and 10 years for other loans.
Express loans are a good choice for self-employed applicants who need quick access to cash, as SBA responds to express loan applications within 36 hours of receipt. This is significantly faster than the five to ten business days required for 7(a) small loans.
Credit and eligibility decisions are made by individual lenders, so requirements vary. However, borrowers must meet lender creditworthiness, minimum business tenure, and annual turnover requirements.
How to apply for an SBA loan while you are self-employed
The process for applying for an SBA loan as a self-employed person varies by loan program and individual lender. However, there are a few 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 check a credit report from at least one of the major credit bureaus – Equifax, Experian, and TransUnion. SBA loans generally require a minimum credit score of 680, but lenders set their own requirements. Understanding your credit profile can help you evaluate your chances of admission and give you an opportunity to improve your score before submitting an application.
- Create a business plan. To qualify for a business loan, you must create a business plan that shows how your business will make money and how it will use the loan proceeds. This is especially important if you’ve been in business for less than two years.
- Determine what type of SBA loan you need. Visit the SBA website to review available loan programs. Choose an option with a borrowing limit and approval schedule that suits your needs. Also, review any program-specific requirements to ensure you qualify.
- Select a loan partner. Enter your zip code on the SBAs Lender Match Tool to find a lender near you. Familiarize yourself with the credit partner’s credit and turnover requirements and application process to confirm your eligibility.
- Identify sufficient collateral. Depending on the SBA program and lender, collateral may be required to secure the loan. Compare lenders and programs to determine collateral requirements and consider them when choosing a loan offer.
- Gather the required documents. The SBA loan application process varies by lender, but applicants are generally required to provide documents such as tax returns, business statements, forecasts, and outstanding debt. Streamline the process by gathering 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 documents are required. Keep an eye out for these communications to avoid delays in loan processing and approval.
Ways to Use SBA Loan Funds
There are a number of ways you can use SBA loan funds to help your business, but permitted uses may be restricted by the specific loan program. Some common uses for SBA loans are:
- Purchase of inventory or equipment
- Payment for renovations or repairs
- hiring new employees
- Paying for marketing or advertising costs
- Expansion of your business operations
- Purchase of a new commercial space
Are SBA Loans Hard to Get?
Qualifying for an SBA loan is not difficult, but the application, approval, and funding processes can be lengthy. That means self-employed entrepreneurs who need cash fast may be better served with an online loan, business credit card, or other alternative.
SBA credit requirements vary by loan 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 make loan payments.
These are the basic requirements for a company to be eligible for an SBA loan:
- Must be operating for profit in the United States or one of its territories
- The owner must have already committed their own time and money to the business
- All other funding options must be exhausted
Alternatives to SBA Loans
If you don’t get a loan, you may still be able to get funding from other sources. SBA loan alternatives often come with higher interest rates or less favorable terms, but they may be easier to qualify for.
Consider these options if an SBA loan isn’t right for your business.
Independent entrepreneurs 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, qualifying with a traditional financial institution can be difficult – and the interest rates and terms are often less competitive than online options.
Expect to pay between 4% and 36% APR for an online personal loan with terms of up to seven years. As always, compare personal loans and the best small business loans before deciding on one and qualify if possible.
business credit cards
Business credit cards are easier to qualify for than SBA loans and have much faster approval speeds, often giving consumers 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.
While credit cards can be a convenient way to pay for small expenses, they typically 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, you should use some of it to fund your business. We don’t recommend withdrawing money from retirement accounts or emergency funds, but using cash can be a good option if you don’t have good credit or are otherwise having trouble approving a loan.
Self-employed entrepreneurs who need access to large sums of money can also opt for equity financing. This involves selling part of your business in exchange for financing. However, this option can be risky as it may involve handing off decision-making to someone outside of your organization. For this reason, this should only be considered as a last resort and you should always have the terms of the agreement reviewed by a commercial lawyer.
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