Unsecured personal loans for self-employed individuals can provide funding for a variety of needs including emergencies, debt consolidation, business startups, and more.

Be prepared. Independent contractors and service professional sometimes need to provide additional documentation to verify income.

Self-employed individuals with top-notch credit scores can often qualify for personal loans based on their history of prompt on-time payment alone. Those with poor ratings often must compensate with strong earnings documentation.

  • Tax return information often required for individuals with poor ratings
  • Better credit scores needed for people without financial documents

Personal Loan Documents Required for Self-Employed

The self-employed personal loan document requirements at lenders in the United States may include tax returns, but not bank statements. Unsecured contracts do not require collateral or down payments. Therefore, banks statements and appraisals are unnecessary.

Individuals with excellent credits scores and strong earnings documentation qualify for the best terms: largest principal amount, lower interest rates, and longer repayment terms.

Bank Statements

Banks statements are not required for self-employed personal loans. These are not small-business loans underwritten by commercial bankers, or secured home loans issued by mortgage companies. You do not have to provide written evidence of consistent cash flow, sufficient assets, or prove that down payment money is legitimate.

It’s easy to get a personal loan. Specialty lenders evaluate applications based on individual qualifications. Be prepared to input the following information into the online form.

  • Purpose of the money – select business
  • Credit score range
  • Identifying information
    • Name
    • Mailing address
    • Phone number
    • Date of birth
    • Social security number
    • Driver license number
  • Bank checking account and routing numbers
  • The self-employed monthly income amount

Be prepared to fax copies of the identity documentation during the approval process.

Tax Returns

Self-employed personal loans frequently require two years of signed tax returns. Applicants with excellent credit scores or a working spouse may be able to squeak by with less documentation.

Be prepared to submit Schedule C & SE and possibly any 1099-MISC forms if applicable.

Schedule C

Most personal loan companies will require self-employed applicants to include Schedule C (statement of profit or loss from a business). Pass-through business entities such as sole proprietorships or single member LLC file this document on their tax returns.

Schedule C helps lenders establish the amount of cash flow the solo operation generates after expenses. You list all 1099-MISC income in this document.

Form 1099-MISC

Most personal loan companies will also request copies of form 1099-MISC when applicable. IRS rules require any individual or entity to issue this form when they make payments exceeding $600 as part of a trade or business.

Three rules determine whether a person qualifies as an independent contractor or an employee.

  1. Behavioral: does the company control what the person does and when he or she does it
  2. Financial: does the payer control the business aspects (income & expenses)
  3. Type of relationship: are there written contracts or employee type benefits

Young adults frequently establish their careers working in the gig economy and often fit into this category.

Entities sometimes deem people working in the following fields as independent contractors. Include all copies of form 1099-MISC to substantiate your total income if this applies to your situation.

Commission Earners

Insurance AgentsLoan OfficersMary Kay Consultants
Mortgage BrokersOutside Sales RepsRealtors

Freelancers

Actors/MusiciansBloggersEditors
Graphic DesignersPhotographersVirtual Assistants

Professionals

AccountantsConsultantsHairdressers
HygienistsInformation Technology (IT)Registered Nurses

Transportation & Logistics

Commuter Drivers
  • Taxi
  • Bus
  • Limo
Ride-Share Drivers
  • Uber
  • Lyft
  • Sidecar
Truck & Delivery Drivers
  • Fedex
  • UPS
  • Owner/Operator

Schedule SE

Legitimate personal loan companies will also require Schedule SE (self-employment tax). Solo workers are responsible for paying the full amount of Social Security and Medicare payroll taxes and must include this document with their tax return.

Including Schedule SE helps the lender verify that you paid all payroll taxes. This minimizes chances of an audit and subsequent tax lien, which might affect your ability to repay the lender.

Personal Loans Without Financial Documentation

Obtaining unsecured personal loans without the needed financial documentation is a common problem for the self-employed. Every business startup needs capital to get off the ground. However, at these initial stages, it is difficult to produce the needed paperwork.

The parameters are very similar for the two most common documentation shortfalls for solo entrepreneurs: proof of income, and employment verification.

Without Proof of Income

Personal loans for the self-employed without proof of income (tax returns) are challenging to obtain. Lenders consider two main criteria when underwriting an application: your risk rating, and the projected debt-to-income (DTI) ratio.

Borrowers who perform well on both metrics can borrow the most money, on the best terms. Self-employed individuals without proof of income rank poorly on one. Therefore, they must rank well on the other, or accept smaller sums or terms that are more onerous.

  • A high DTI ratio excludes many applicants or forces them to scale back the principal amount. Calculate the DTI by dividing the monthly debt service payments by monthly income. The denominator in the fraction is zero without evidence of earnings. An infinite DTI is not good.
  • An excellent credit score may qualify some applicants who lack evidence of earnings. Many bankers will approve smaller amounts using the risk rating alone; when the applicant’s consumer report is pristine, and their credit score is above a specified threshold – perhaps 740 and higher.

Without Employment Verification

Obtaining a personal loan without employment verification is a similar problem area for startup businesses. Lenders prefer an independent confirmation from an employer that you have a steady job. Of course, this is impossible once you leave corporate America and strike out on your own.

Here are the main strategies and considerations for borrowing money without employment verification.

  1. Build and maintain a pristine credit report. Underwriters will often auto-approve small amounts based solely on the applicant’s credit score – for those with very high ratings.
  2. Begin with a side hustle while you are still working. Establish an earnings history for the new venture and borrow a suitable amount based on the existing revenue stream. Apply for the loan while still working and able to verify employment.
  3. No credit check and no job confirmation is a deadly combination. Underwriters will reject most applicants who cannot establish a record of on-time payments or an ability to earn an income. Missing one element makes things very difficult. Missing both makes it virtually impossible to raise the funds.
  4. Apply for a small business startup loan instead. Commercial bankers will want to review a detail, written business plan along with accounting records. This may include your balance sheet and income statements.

Bad Credit Owners

Personal loans for bad credit self-employed borrowers are a stretch – especially if the person has difficulty providing proof of income spanning two years. People fitting this profile have very few good options.

  • Payday lenders will ignore bad credit history if the startup business owner can demonstrate consistent deposits into a checking account. Be very careful when rolling over a payday cash advance. The fees add up quickly if you cannot retire the entire obligation in the one or two-week period.
  • Installment loan companies may also ignore bad credit history if the startup business owner has collateral to pledge such as a truck or other equipment. Once again, read the contract language carefully and understand the late fees and risk of losing the tools of your trade.

Posted 03/2/18 8:15 PM by Kevin Haney MBA