Business Financing Options for Self-Employed Individuals

The self-employed market is probably one of the most under-served markets when it comes to business financing. Most banks and lending institutions don’t provide financing to the self-employed because their volume is too low and banks can’t make enough in lending fees. To make matters worse, most self-employed individuals don’t keep good business records, which makes lending to them even more difficult.

However, there is a large, untapped need in this segment. Most people view self-employed individuals as home-based entrepreneurs who focus on a couple of industries in which they can operate as individuals. It’s common to think that the self-employed only include management consultants, entertainers, plumbers, contractors, etc. This is not the case.

Self-employed individuals and home-based businesses are involved in a number of industries, including manufacturing and transportation. The self-employed are a very diverse group, and they are an important part of our economic backbone. Look at this chart of home businesses – broken down by industry. This can be an eye-opener.

Want funding? Get your finances in order

If you want to get business financing, you need to treat your self-employment professionally. Throughout my career, I have spoken to many self-employed individuals who needed financing but could not produce a single reliable financial statement. Their profit and loss statements were inaccurate. Balance sheets didn’t balance. Their forecasts were often laughable and had no backup whatsoever.

It’s no wonder that they aren’t treated seriously and can’t get financing. How can you ask for funding if you don’t even know your current financial position? Would you fund them?

Before trying to get funding, you should get your financial house in order. This means getting an accounting package, such as QuickBooks, to manage your finances. If you are just starting up, setting up QuickBooks is relatively easy. But if you have been operating your business for a while, you may want to get a CPA or bookkeeper to help you set it up initially.

And once it’s been set up, be sure to keep your accounting entries up to date. This is fairly easy. Depending on your type of business, you can enter transactions daily or weekly. With this system in place, you should always be able to produce the three most important documents you’ll need to manage your business – and get funded:

  • Balance sheet
  • Income statement
  • Statement of cash flows

Getting funded

Once your finances are in order, the next step is to look for the actual funding. Here is a list of business financing resources that are available to self-employed individuals. Unfortunately, there are not many options.

Your own resources

Obviously, one way to get your business funded is to use your own resources. You can use your own savings, other assets, or leverage your personal credit. Options include bank accounts, investments, home equity lines of credit (HELOCS), retirement savings, and credit cards.

Personally, I’d be apprehensive about risking my home or my retirement savings to finance a business. If something goes wrong, you’d stand to lose your business, your home, and your future in one fell swoop. This can be devastating. But that’s just my personal standpoint.

A more conservative approach is to use your savings or other discretionary investments. Sure, you run the risk of losing them, but if things go wrong you’ll limit your losses.

Another common approach is to use credit cards. These can be useful if you are using them to finance short-term transactions, such as a supplier payment for an order that you need to deliver. However, be careful when using cash advances, which can be expensive. And be sure to pay the card as quickly as possible, or your personal credit may take a hit.

Friends and Family

Another common way to finance self-employment is to ask friends and family for a loan – or an equity investment. Frankly, I have always steered clear of this alternative. Nothing sours a great friendship or family relationship faster than a money dispute. Also, you can expect that family members or friends that lend you money will want to become involved in your business. They may not help you handle operations, but they will certainly ask you a lot of questions. I’ve always said that even “silent” partners can become very vocal when their money is at stake.

However, if you decide to go this route, you should handle it professionally. Provide them with accurate financial statements, give them a realistic forecast and payment schedule, and, lastly, get a formal loan document in place. Yes, this sounds like a lot of work – because it is. It also improves the chances of saving your relationship if something goes wrong.

SBA Microloans

This method is actually a personal favorite. The SBA has a microloan program designed to help small companies and self-employed individuals. Loan amounts vary up to $50,000. The beauty of the program is that getting a microloan is substantially easier than getting a conventional SBA loan. This makes a microloan ideal for the self-employed.

What makes this program great is that many SBA microloan providers also give business management classes and provide technical assistance. This can be a great resource if you need help. Here is a list of providers in every state.

Accion

Accion is the largest microlender in the US and is also a partner of the SBA Microloan program. Accion provides affordable financing and financial education for small business owners. Their loans range from $500 to $50,000. Here are their loan products and qualification requirements.

Factoring

Factoring is a solution that has been gaining traction in the home business and self-employment market in recent years. It’s a solution that solves cash flow problems related to slow-paying commercial customers. Incidentally, factoring is a solution that my company provides. You can learn about it here or by watching this video.

You can use factoring only if you sell to commercial clients that demand net 30-day terms, and if you cannot afford to wait for payment. Factoring can help by financing those slow-paying invoices and providing immediate cash flow. One advantage of factoring is that the most important requirement to qualify is to work with creditworthy commercial clients. This makes factoring ideal for small firms with big clients and limited assets.

Purchase order financing

Like factoring, purchase order financing has been gaining popularity in recent years. As its name implies, purchase order financing can be used to finance purchase orders. It works only for companies that resell finished goods and helps pay for supplier expenses. To qualify, you need to have a purchase order from a strong/large client.

This solution finances the supplier costs (i.e., cost of goods sold), enabling you to fulfill large purchase orders that you could not otherwise afford to fulfill. You can learn about purchase order financing here (note, this solution is provided by my company as well).