A Freelancer's Guide to Business Credit & Loans

Mar 7, 2022

(Art Credit: Pedro Gomes)

If you are just starting out as a freelancer, then you will need all of the help that you can get as you work to find clients, market to the masses, and turn an idea into a full-fledged career. While you probably have plenty of gumption and a will to succeed, you will also likely need money to get your business off of the ground.

While freelancing provides plenty of perks over the traditional full-time job, it does have some drawbacks, especially when it comes to profits and income. It may take months to years to get the consistent earnings that you require, and you may need to get a loan in the meantime. The problem is that as a freelancer, obtaining a loan won’t always be easy, but it is not impossible. To help you out, we have some tips on loans that freelancers should pursue, what you’ll need to obtain them, and how you can make the most out of your money.

You Need Good Credit

When banks consider loaning money to a small business, they look at several factors, including your credit score, your capacity to repay the loan, the potential collateral that you can provide to help secure the loan, and other important factors. As a freelancer, you may not have the detailed business plan that traditional companies have because you are working for yourself, and if you are just getting started, then you likely don’t have any collateral. All of these factors make it difficult for you to get a standard business loan.

What lenders are really looking for is your ability to pay back the loan on time, and if you don’t have proof of consistent work, then lenders get nervous. However, one way that you can prove your sense of responsibility and ability to pay back your debts is by having a good credit score. The minimum score that you can have to even be considered for a loan is 580, but you won’t have much luck. However, if you have a stellar credit score in the 700-800s, then lenders may look at you more kindly.

If your credit score leaves something to be desired, then your next step is to raise your score to a promising level. This is not something that will happen overnight, but you can make the change by reviewing and reporting any errors on your credit report and ensuring that you pay your credit card bills on time. You should also focus on reducing your debt by either paying off your largest credit card first or paying off all of your smaller cards first, so you only have the big one left. If you don’t have a credit card, then you can still do the same routine with your debit card.

Other Loan Options

Even if you have a great score, the chances of getting a traditional loan are slim. However, there are many other ways that you can gain capital for your freelance business. For instance, you can research companies like Upstart or Prosper, which often offer freelancers loans of up to $50,000. Companies like these want to see smaller businesses succeed, so in addition to your credit score, they will also consider other factors, including your education and job history.

Since you are likely a one-person company, you might also consider taking out a personal loan. While your credit score should still be decent, banks will often consider giving you a loan based on your income as well as the property you own, including your home and vehicle. The good news about personal loans is that you can get them quickly, often within a few days. The downside is that you will likely be paying a higher interest rate.

If you are really confident in the success of your freelance business, then you could consider asking family or friends for a small loan until you get your feet on the ground. Any agreement should be documented for the benefit of both parties. If you aren’t comfortable going to someone you know, then you might also consider a crowdfunding platform like Kickstarter. While there, you can make a video advertising your business, and you can offer rewards to anyone who contributes to your cause.

Budget to Make Your Money Last

If loans are hard to come by and your freelance income isn’t as consistent as you’d like, then you will need to be smart with the money you do have. To understand how much money you need and what you can spend, you should create a budget. This should be a detailed list of all of your incoming funds and every expense you have during the month, whether that is your utilities or gas for your car. If you find that you are spending more than you earn, then you may need to cut some of your unnecessary expenses, such as your streaming services or your printing and paper consumption so you can save on ink.

Beyond budgeting, you will also need to be smart about how you move your money. When you get paid by a client, what do you do with that money? Are you saving some for future or unexpected costs? It is a good idea to split up your earnings and put a portion in a high-interest savings account every month. Do not withdraw those funds unless absolutely necessary, and while your cash sits in that account, you will make more money in the form of interest.

As an independent contractor, you have the choice as to if you want to pay your taxes quarterly or a lump sum at the end of the year. If you are still growing your business and you are unsure where your next profit will come from, then consider the quarterly option. By going this route, you can pay a smaller amount more frequently, which may be easier with your sporadic income. This option also helps you avoid the potential of owning a large amount of money at the end of the year when you may not have it.

In the end, if you have a good idea for a freelance business, then you should not be afraid to go forward and make your dream a reality. You just need to be careful along the way. Consider the tips above, and you will land the resources you need to compete.

This is a post from a member of the Freelancers Union community. If you’re interested in sharing your expertise, your story, or some advice you think will help a fellow freelancer out, feel free to send us your blog post.

Noah Rue

Noah Rue is a journalist and a digital nomad fascinated with the intersection between global health and modern technology.