There are rewards to be enjoyed from self-employment in the long run. These rewards include a perfect work-life balance. Self-employed individuals also enjoy an unlimited income cap.
You can say that the sky’s the limit when it comes to earning money as an independent contractor. It all depends on how much you want to earn or how much you want to work at any given time.
The biggest challenge to being self-employed, on the other hand, is financing. There will be a time when you’ll need to borrow money to keep your enterprise going. Banks and traditional lending institutions view independent contractors as a high borrowing risk. If you do get approved, you’ll have to contend with high-interest rates. More often than not, you’ll get disapproved.
Getting approved for a loan for independent contractors, however, is not impossible. There are personal loans available that you can take advantage of. They do come with their own set of risks in case you default, but they also provide vital assistance when needed.
Here are five types of personal loans you can consider if you need to borrow money as a self-employed individual.
HELOC is an acronym for Home Equity Line of Credit. Basically, applying for a HELOC means that you’reborrowing money guaranteed by your house’s equity. Like a business line of credit, HELOC allows the entrepreneur to take out loans whenever he needs to and repay the amount upon maturity date. The amount guaranteed would depend on how much equity you’ve already paid for.
Like any form of loan, a home equity line of credit comes with its own interest rates and repayment terms. These would vary from lender to lender. You’ll have to do your own due diligence and explore whatever options you have.
Bear in mind, however, that HELOC puts your ownership of the house at risk. The lenders will foreclose your house and auction it off if you fail to repay your debts. Take out loans from your credit line only when needed, and at amounts you’re comfortable repaying.
Small Business Administration Microloans
SBA microloans are small-scale financing guaranteed by the US government through the Small Business Administration. One of three loan programs offered by the SBA, microloans offer up to $50,000 for small business entrepreneurs and self-employed individuals.
These microloans are available through community organizations that received accreditation from the SBA. They are less stringent compared to other personal loans. You can use the money to purchase new equipment and inventory for your small business. SBA microloans have comfortable term lengths that could be as long as six years. Interest can be a bit high, however; rates can be between 8% and 13%.
Business Credit Cards and Lines of Credit
Business credit cards give various benefits to an independent contractor. They help proprietors start building credit in their business’ name, not their own. Accumulating positive credit for the business allows it to access financing without forcing you, the entrepreneur, to make a personal guarantee.
Similar to the HELOC, these two credit sources give your business a source of cash to draw upon whenever the need arises. All you have to do is pay your obligations in time. Timely payments count towards your business’ credit score and increase your eligibility for other forms of financing later on.
Lenders, however, may ask you to make a personal guarantee when you apply for your first business credit card or line of credit. The lender will want to know about your personal credit as well as information about your independent contracting business. They’ll decide on annual interest rates and credit limits based on the data that you provide them.
Community-based lending is also a great source of loans for independent contractors. Community lenders are usually organizations that pool together their members’ money and loan them to earn money from interest.
The biggest advantage to community-based lending is that they are made up of people who know each other or, at the least, share a network of mutual acquaintances. These individuals can vouch for every member’s ability to pay, making the approval process a lot easier.
Community-based lending may also provide avenues for relief in case a debtor defaults on their loan. In most cases, the loans are interest-free or charge significantly lower interest rates compared to traditional financing and personal loans.
Financing From Friends or Family
Last but not least, you can ask for financial assistance from your friends and family to keep your business afloat. This approach bears the same advantages as community-based lending because of the trust factor.
Your friends and family members know your capabilities more than your colleagues would. Some of them may even want to let you borrow money without interest.
There are also mutual benefits that you can enjoy from a loan provided by friends and family. You can negotiate in most cases on repayment terms. Family members and friends may be willing to forgive the debt for a time when you’re experiencing financial difficulties.
It’s important to honor commitments with this kind of loan, however. Defaulting for no good reason could lead to the loss of relationships. As an entrepreneur, you don’t want to burn bridges unnecessarily. Antagonizing your friends and family over a debt could be detrimental to your business in the long run.
Being self-employed is a dream for many people. However, most feel discouraged to pursue this life because of the challenges they face. One of these significant hurdles is access to financing.
Traditional financing is nearly inaccessible for independent contractors because of the high risk associated with them. However, they can receive financial assistance through these five personal loans as well as other forms of alternative financing.