The Best Business Loans and Financing Options for Freelancers
The gig economy is booming, with up to a third of the U.S. workforce now working as freelancers. While there are many perks to freelancing, most freelancers are attracted to the fact that they can choose both when they work and what jobs they work on. However, the freelancer who seeks opportunities to grow will face many issues, not least of which is the challenge of securing a loan from a bank or other traditional lender.
Most banks view freelancers as high-risk, and as such, may be unwilling to enter a loan agreement. Because a freelancer is considered a sole proprietor, he or she alone is liable for all losses and debts his or her business may incur. If the freelancer gets hurt or sick and cannot work -- or is just terrible at running a business -- the bank is left holding the bag.
Online lenders offer an interesting alternative. Typically, these non-traditional lenders have more relaxed loan approval criteria and a swifter approval process. Importantly, your personal income, assets and credit score are assessed for loan approval, not the value of your business. You should expect to pay higher rates of interest, a natural trade-off for the perceived risk you present.
These are the different types of financing available to freelance businesses.
Business loans -- whether from a traditional source, like a bank or credit union, or from a nontraditional online lender -- are almost always outside the reach of a freelancer. Typically, only well-established businesses with healthy profit histories, low debt and good credit are eligible for business loans.
Thankfully, personal loans are easier to get. Even when you take out a personal loan with the intention of using it for your emerging business, the lender will only look at your personal credit history and financial health. These lenders tend to focus on your income sources, your credit score and your debt-to-income ratio. They don't care how well your fledgling business is doing; they don't even care whether you've started your business yet. The caveat here is that you won't be able to borrow as much money as you would with a business loan, as personal loans tend to max out at $35,000 to $50,000.
Lines of credit
You may already know that banks issue lines of credit, but did you know that many online lenders offer lines of credit as well? The principle behind a line of credit is simple: You're given access to a certain amount of money, and you can draw however much money you need from those funds (up to the maximum limit) at any time. You only have to pay interest on the money you actually borrow. If this reminds you a credit card, it's because credit cards are essentially simplified lines of credit!
The good news is that lines of credit often have more reasonable rates, fees and repayment terms than credit cards.
Invoice factoring and financing
B2B businesses that must maintain a more or less consistent cash flow to function may benefit from invoice factoring. It's pretty simple, actually. By selling your unpaid invoices at a discount to factoring companies, you receive cash up front. If you suffer from late-paying customers, invoice factoring can be a godsend.
Invoice factoring is not the same as invoice financing, though the two share similar properties. While invoicing factoring works by selling unpaid invoices, invoice financing is more of a loan in which your invoices act as collateral. Rates, terms and fees will vary from lender to lender, but both invoice factoring and financing can be very good alternatives to a traditional business loan for freelancers who run on a B2B model.
Some freelancers might find that microloans are a good solution to their funding problems. Microloans are almost always less than $35,000, and typically range from $5,000 to $10,000. The best part about microloans is that they tend to feature low interest rates.
These loans are often aimed squarely at marginalized groups, like women, veterans and minorities, that might have a hard time getting funding from a traditional source, but freelancers can capitalize on the lenient terms and rates offered by microlenders as well.
Unless you've been in coma for the past five years or so, you've probably heard about crowdfunding websites like Kickstarter and GoFundMe. Crowdfunding is an excellent way for new business owners to source funds, particularly if your business enterprise is in the creative arena. With rewards crowdfunding, potential backers fund your project and in return receive access to your products or work. Crowdfunding is distinct from lending in that you don't have to repay the funding.
The downside of crowdfunding is that it requires a lot of time, thought and effort on your part, both to craft a strategic campaign and to follow up with donors afterwards. If you don't have the time or inclination to make your campaign a full-time job for a while, crowdfunding may not be for you.
No business owner has it easy, but freelancers have an especially challenging lot in life. You have enough hurdles to overcome without worrying about financing your dreams. Happily, today more than ever, solid funding options exist for the freelance business owner. Whether you ultimately go with a personal loan, a line of credit, invoice financing, a microloan or crowdfunding, make sure to do your due diligence. Before getting a loan, it's a good idea to make sure you have a solid business plan that includes a payoff schedule that is both easily within your reach and shorter than the original life of the loan.
Funding awaits the freelancer who is willing to put in the work to research, evaluate and apply for the right kind of loan. Good luck!