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


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.