Why it’s hard for freelancers to get approved for a loan

freelance-pic

Freelancers are the new wave of the labor economy, also known as the gig economy. Freelancers are essentially small business owners who make their income going from particular projects or “gigs.” Freelancers are in a wide array of industries, from graphic artists, musicians, computer programers, writers, and sales people.

As individual business owners, freelancers often have a hard time getting approved for a business or personal loan because of the very nature their income and credit is viewed by lenders.

Lenders categorize freelancers as independent contracts who mix their business and personal time and finances together. Therefore, personal liabilities and debts would directly affect the debts of the business.

Also, since most freelancers are individuals who only have the capacity to take one or a few projects at a time, the potential for growth is more limited compared to larger companies. Growth such as hiring employees, investing substantial capital in the business, or partnering with larger companies is not as common, and that makes lenders wary that their loan is at risk in the long term.

Lenders also value their lending criteria by the equity of what they are borrowing against. For example, a mortgage lender values the property to assess the loan amount. Because the freelancer is the equity, it is hard for a lender to assess the value of what they are lending on, which raises the risk for the lender.

So how do freelancers get approved for loans with all these difficult hoops to jump?

There are several ways to go about to get a business or personal loan as a freelancer:

Have your finances in order. Pay off any outstanding credit card debt and increase savings amount in the case there are any gaps between projects. Have you personal and business tax returns and any business financial information such as profit/loss statements and balance sheets updated and clear.

Brand your business. Even though you might be a small operation, creating a brand will present to lenders a larger company, which creates value. This value translates to equity. Branding yourself includes memorable business name/logo, marketing campaign , and strong online presence by appearing in blogs and articles.

Speak to alternative lenders. Typical banks shy away from lending to freelancers. Alternative lenders have more flexible standards who will work that will overlook the requirements by larger banks. Rates are dependent on how confident the banks will get their  loan back in the future. Speaking to a variety of these type of lenders allow freelancers to compare the options specifically available to them and their business.

Advertisements

The Different kinds of business loans

If your a small business owner, the ability to get approval for a loan is just as important as having the right insurance or a clever accountant. This is because loans can provide a blood infusion in times of rapid growth or unexpected slowdown.

Installment loans

An installment loan is the most common type of business financing. These type of loans have a set term of the length of the loan, a payment schedule, and a fixed or variable interest rate. These loans can be secured or unsecured and rely heavily on the business’s credit and payment history.

Line of credit

This type of loan allows you to have an approved amount of funds sitting in an account to be used when you need it. You can draw either the whole amount or any partial amount. Whatever that amount drawn would be the balance to which you pay interest on.

Lines of credit is good if you don’t need funds right away but still want availability of cash on hand whenever an emergency comes up.

Accounts Receivable Finance

This is where a business receives cash on their accounts receivables. Depending on the lender, it is either an advance against your outstanding invoices, or the lender buys your A/R at a discount, also known as factoring.  This type of financing allows you to bridge the gap of cash flow issues while waiting for your invoices to get paid.

Merchant Cash Advance

Merchant Cash Advance gives you an advance based the business’s credit card revenue. The lender would then receive money back for the loan through your credit card transactions, along with their financing fee.

Merchant cash advances work best for business’s that do most of their revenue through credit cards.

The fees can be very expensive due to the high risk the lender is taking, since their return is based on credit card volume, which changes daily.

Equipment and inventory loans

Your business’s equipment and inventory have value that can be used as a collateral to get approved for a business loan. This includes the products you sell, computers, machinery, vehicles, or other assets you use to run the business.

It important to note that the lender focuses less on your business’s financials than the actual value of the assets, allowing flexibility if your a new business or have bad credit.

Seed Funding

Lenders who lend to start ups take a creative approach to this type of lending, since the business is new. Many times the lenders qualify you based on the revenue model, or industry your in.

If your a new business or even an existing business confused of which route to take, it is best to speak to a variety of lenders that each offer these different types of loans.  This can give you a comparison of the different terms and rates you qualify for and the risks involved with each loan type. Only then will you make the more informed decision.

How Online Lending is different from traditional lending for Small Businesses

If your a small business owner, the ability to get approval for a loan is just as important as having the right insurance or a clever accountant. This is because loans can provide a blood infusion in times of rapid growth or unexpected slowdown. 

With online lending becoming a legitamate option for businesses loans, it is important to know the differences of online lending from traditional bank lenders.

Approval Requirements

Online lending for small businesses have more flexible requirements than traditional bankers.

For a traditional bank loan approval, businesses and their owners need to have a good to excellent credit score and be in operation for at least two years. Online lenders, on the other hand, typically require no minimum in business to qualify as long as there is some revenue. Also, online lending will accept the business owners having no credit or bad credit. 

Decision Process

Traditional banks require significantly more paperwork and verification than online lenders. This includes personal and business income tax returns, legal documents and other owner information. Traditional banks will also ask for business financial history, detailed profit/loss statements and verify any assets. 

Alternative online lenders only require that you have a bank account to take into account all the activity of transactions so as to qualify for the loan. 

Funding Time

Depending on the business, traditional banks take anywhere from two weeks to a few months to approve and fund your loan. This can be a stressful wait time for you, especially if the business needs cash right away. 

In comparison, online lending decisions are instant once the lender has all the required information. Once it is approved, funding takes place within a day. 

Interest Rates and Fees

Because online lenders have more lenient standards and faster funding times, interest rates are higher than traditional banks. Standard bank loan interest rates are in the single digits. Online lending rates will be in the double digit range. Online lending also might have higher points or fees upon originating the loan. 

Its important to understand where your business stands in terms of the business lending standards. If your an established large business with lots of assets and and good credit, the lower cost of traditional banks will be a better option. But if your business is newer without good established credit, the cost of alternative lending might outweigh the hassles of the traditional loan process. 

More importantly, by comparing the rates and fees offered by several online lenders, you will allow your business to negotiate the most favorable loan terms and costs. 

The pros and cons of private student loans vs. federal student loans

student-loan-pic

Opting for a loan to meet the financial demands for better education is mandatory for most students, but it can be tricky. Student loans are broadly classified into two types: federal loans and private loans.

Federal loans are the loans provided by the federal agencies to pay for college fees etc. The federal loan is a regulated and governed by the Federal Department of Education. At present, five types of federal loans are available to students. Students/Parents need to meet certain conditions and special scholarship grants before applying for Federal loans.

Private loans, on the other hand, can be easily acquired by students who cannot get federal loans. Private loans are provided by private lenders and other financial institutions to students for their entire education fees, including costs of books, housing, transportation, etc.

The pros of federal loans

  • Low income eligibility. Federal loans are more useful for students and their parents. who show little to no income.  The requirements and the amount of money to be given are evaluated by the college itself, based on the student’s background and academic record.
  • Flexible repayment mode. No requirement of financial need for borrowing and extension of repayment date even after graduation.
  • Loan forgiveness policy. On some types of Federal students loans allow partial or complete loan forgiveness if certain standards are met. Though this is not easy.
  • Potential to get subsidized Loans. Eligible candidates are not charged any interest till the repayment date and a grace period of six months is also allowed.

The cons of Federal Loans

  • Background restrictions. Can only be acquired by U.S. Citizens or permanent residents. College funds restrict the amount that can be loaned, and they are only given to students with an excellent academic background.
  • Usage of funds. Federal loans can have limitations on how it could be used and require a separate application for a loan each academic year.

The pros of private loans

  • Private loans are easy to acquire. Easier eligibility criteria and higher amounts can be borrowed.
  • Simpler application. Formal complexities are minimal; can be applied for online or by phone, so no meetings are required. FAFSA forms are not required in most cases and, if any, the charges are very much less.
  • Interest is tax-deductible. And there is no prepayment fine.
  • Quick funding. Once approved, funds are given immediately, and several cosigner options are available.

The cons of private loans

The downsides can be listed as follows:

  • Credit check requirement. The lower the score the higher the cost.
  • High-interest rate. Usually higher for private loans.

The bottom line is that, private loans have functionality and availability, while federal loans are a big harder but more flexible. A loan for an individual’s education is an investment, so speaking with several agents from a variety of lenders will give you a more informed decision on which route to take.

 

Red Office Folder with Inscription Assets.

When looking for a business loan, having a collateral to secure the loan will not only help with getting approved, but also the cost of the loan. The risk is that the lender has the ability to obtain the collateral if you default on the loan. But because the interest rates for secured loans are usually lower than unsecured loans, it is best to weigh the options and see if the costs benefit the risk for your business.

But before speaking with lenders, its best to evaluate what assets your business can use. Here are some assets that can be used:

Real Estate

Probably the most common collateral banks look for. Real estate is fairly simple to appraise and holds its value in the event of repossession. Business lenders can use your business’s real estate or personal as collateral.

Lenders will look for the amount of equity you have in the property, because the amount of mortgage owed would reduce the value of the collateral.

It is suggested to get an independent appraisal once you decide to use your property as collateral.

Vehicles

Business vehicles, as well as any personal vehicles, can be used as collateral. Similar to real estate, the lender will look if there are any loans on each vehicle to assess its worth.

Valuing the vehicles can be used with vehicle research companies such as Kelly Blue Book.

Inventory

Inventory your business sells may be considered collateral as long as you have a track record of inventory and strong sales history. Lenders will evaluate the current and future value of your inventory to determine that cost of the loan.

For most lenders, inventory is valued usually at wholesale cost or at the market value, whichever is lower.

Equipment

The equipment you use to operate your business, such as printing machines, has value at which can secure a loan. Lenders will typically lend a certain percentage of the value of the equipment.

Same as inventory, equipment is appraised at wholesale cost or market value, whichever is less.

Accounts receivable

Factoring (selling) your outstanding account receivables will allow you to receive financing based on the value of your income invoices, which requires less appraisal time than other assets. This give you the cash needed faster than with other assets. The requirement is to have a decent size amount of invoices as different lenders have different minimums.

Accounts receivables are underwritten based on the value of the portfolio minus collection and default costs.

Others

Alternative lenders will be more creative than traditional banks when it comes to helping you get a loan. This is why before deciding on moving forward with either a secured or unsecured loan, speak to a variety of business lenders and see what flexibility each lender has. It is important to note that it is in your advantage to secure the collateral that is least important to your business with the highest appraised value. That way you minimize the loss in case of default and still able to get a secured loan at the best price. This requires negotiation on your part.

How to get a personal loan if you don’t have regular job income

Getting approved for a personal loan when you don’t have stable employment can be difficult but it is not impossible. Traditional banks will not lend without you having consistent proof of income. So if you are in need of cash, consider the options.

Here is how you can obtain a loan without having a regular job income:

No-income verification loan 

These are short term loans that do not require proof of employment to receive cash, usually between $100.00-1000.00. Most of these lenders do require an active checking/savings account that they will use as an assurance on the loan.

This type of loan is also good for those who freelance work, or do side gigs that can’t show deposits. A good credit score is a plus to getting approved but not always necessary.

Use a Collateral

If you have an asset such as a car or house, you can get a loan that does not require you to have any income because the loan is secured by that asset. It is important to discuss with these asset based lenders all costs and fees to make sure you are confident that you will pay the loan, because in the event you do not you risk losing the asset to the lender.

Another collateral based lender is a pawnshop, which is more flexible with your collateral in that it will accept jewelry or antique items to give you a short term loan.

Have a cosigner

Someone with verifiable income who will sign the loan with you will not only help in approving the loan, but also lower the rate because the risk is minimized for the lender.

Alternative Income Sources

If you don’t have a regular job but you still have an income source you are still able to qualify for a loan. An example of alternative income sources would be child/spousal support, assistance from family, or a pending court settlement. Different lenders have different guidelines of showing proof of alternative income sources, which can be as simple as a letter to showing history of payments from bank statements.

Remember, lenders are interested in giving you a loan, but they have to feel confident that it will be paid back in full with interest. So even though you might not have a current stable income, explore these routes with several lenders to get you the cash you need.

When you should consider selling receivables instead of getting a business loan

receivables-pic

If you are a small business and on the hunt for cash funding, the first thing that comes to mind is a business loan. But before securing a business loan, you should definitely compare the option of selling your receivables to get cash vs getting a traditional business loan.

Here are the reasons why:

Saves you on A/R collection costs

Cash flow is account receivables (A/R). But once you send out your bill, there is a collection time and cost to get the A/R paid. Depending on your industry, that can range from two weeks to 3 months or more. Getting a standard business loan will not make collection costs go away. Selling the receivables will, since you are selling paper that other wise you would have to wait to get paid on.

You don’t need to be in business a long time

As long as you have clients that owe you money via invoices then it does not matter if you started 60 years ago or 6 months ago. Business loans on the other hand, have a certain requirement of time in operation.

Minimal background and paperwork verification

Account receivable buyers, also known as factoring companies, do not place focus on your business’s credit and payment history, because they are purchasing paper. If anything, they are more concerned about the credit and payment history of the vendors who owe you money.

Less liability

This is a big advantage, because even if selling your receivables is more expensive than a business loan, you are not adding more liability.

Selling your A/R does not require any collateral such as property, equipment or business assets, minimizing risk in case your business slows down.

Faster Funding time

Once a factoring company agrees to purchase they A/R, funding is as little as 24 hours. This fast approval time helps your cash flow if you need to pay your vendors, employees and suppliers.

If you are wondering if you have enough receivables to receive the amount of financing you need for your business, it is best to speak to several companies that purchase A/R and negotiate with them the most favorable rate. Standard rates of purchase are 70-90 percent of the A/R amount, so the higher they pay, the more money comes to you. Also, different companies have different guidelines on the A/R and its best to choose the company that has the most flexible underwriting.

Another important aspect is to discuss with each A/R factoring company if they are recourse or non-recourse. Recourse means that if the A/R does not get paid by your vendors, you are still responsible to pay each uncollected invoice. Non-recourse releases that responsibility. The rates of purchase may change based on this and it is important to discuss with each factoring company these terms when you apply.