Perhaps you’ve just been struck by the inspiration to start your own business. Or you’ve already established yourself and have come upon an opportunity that’s just too terrific to pass up. Many freelancers find themselves in the right place at the right time. But often they don’t have the financial power to seize the moment. That’s not uncommon in any business, small or large. But many freelancers miss out because they don’t have the one thing larger businesses typically do have—and that’s credit.
Sure, you’re probably accustomed to putting small purchases on your VISA card. But credit cards come with high interest. And depending on what you need to purchase to take your business to the next level, your credit card limit might not be sufficient to cover it.
That’s when a small business loan can come in handy. And getting one isn’t as complicated as you might think. What’s more, as we all do our best to thrive through the uncertainty of the global pandemic, there are a number of new lending programs available to help us take advantage of the opportunities that come our way—yes, even now. Scratch that. Especially now!
Economic recovery will come. Positioning yourself for success when it does is a smart strategy. So let’s take a look at some of the options you have in the here and now for borrowing money. Even if they might not pay off immediately.
Government Loan Programs
You’ve probably heard about the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). By now, it’s sort of infamous, with controversial reports emerging about how and to whom PPP loans were extended. The PPP ran out of money (a couple of times) and has been suspended for the time being. The PPP may come back, but with legislation stalled in Congress, there is no predicting when or in what form. But that’s okay. Those loans, while they offered exceptional benefits, were pretty restrictive and not particularly well-suited to freelancers. The amount you’d be able to borrow as a sole proprietor was small and the funds couldn’t be used for many of the business-boosting purchases you might have on your mind right now.
Enter the Economic Injury Disaster Loan program (EIDL). The Federal government has funded this program through December 31, 2020. Freelancers and sole proprietors are eligible to apply for EIDLs if they can demonstrate that they have lost business during the coronavirus crisis. In other words, if projects became fewer and far between or your monthly earnings decreased since the onset of the pandemic, you are likely to be eligible to borrow money under this program.
EIDL loans can be used for a fairly narrow range of purposes. If you’ve fallen behind in your rent or utilities, you can use the funds you borrowed to catch up with your bills. If the car you use to get to client meetings needs work and you haven’t been able to afford to repair it, you can pay your mechanic and get back on the road. But while you may not be able to use the funds to buy new business software or build out the perfect office for client meetings, paying some of your eligible obligations—like rent and utilities—with EIDL funds can free you up to make the purchases you need to take your business to the next level.
EIDLs come with a low, fixed interest rate of 3.75%. You can take up to 30 years to pay the loans back. If you borrow less than $25,000, you won’t be required to put up any collateral to back up your loan. You can apply for an EIDL online and there isn’t a great deal of data-gathering required. You will need to state your total gross revenue and your cost of goods sold from February 2019 through January 2020, but that information should be available from you 2019 tax return. If your loan application is approved, you’ll receive funds in about three weeks. Incidentally, you can receive an EIDL even if your business is relatively new. You just need to have been in business since February 2019.
The Private Loan Option
Despite the uncertainty of the economy, banks are still in the business of loaning money. In fact, due to a couple of financial market trends we won’t get into here, interest rates on many different types of loans have fallen since the start of the pandemic.
While you’re unlikely to find a private small business loan that can match the interest rate of an EIDL, the best small business loans offer much more flexibility. You can lower the overall cost of your loan by taking it out for a shorter period than the 30-year term that comes with EIDLs. Most importantly, you can use the funds you borrow as you see fit to take advantage of the business opportunities you see in front of you.
Have you been struggling to land business because you’ve been unable to pay a designer/developer to create a great website for you? Bingo. Would you be more competitive if your video studio had a bigger green screen, better cameras and lighting, or the latest video-editing software?
Your private small business loan could help you gain the edge you need. Applying for a private small business loan is more complicated than applying for an EIDL loan and you’ll have to supply more information and documentation. But due to their flexibility, private loans may better suit a freelancer’s needs.
Top Tip for Applying for a Small Business Loan
No matter which type of loan you opt to apply for, take a good look at your credit profile. If you haven’t done so recently, download a free copy of your credit report.
Your credit score is probably the most important element of your report. Lenders offer their best interest rates to their most creditworthy applicants. There are ways to improve your credit score and, if yours is short of where you’d like it to be, it’s a good idea to implement some score-boosting tactics before you apply for a loan.
Making sure all of your accounts are up-to-date is the first step. Even if you can only afford to make the minimum payment due each month, make sure you do it, on every account every month without fail. If you’re in a position to pay down some credit card balances or make an extra mortgage payment, that’s another way to up your score.
Credit bureaus look at the percentage of your available credit that you’re actually using and your debt-to-income ratio to determine your score.
Good Medicine for Freelancers
With everything else you have to attend to in the course of running your business, it’s easy to ignore all but the most immediate financial matters. But it’s important to give some thought to your long-term financial strategy—particularly as it relates to your overall business plan. Applying for a loan presents a greater opportunity than just putting some money in your pocket. The process will give you more clarity as you map out a path to success.
Susan Doktor is an independent journalist and business strategist who hails from New York City. She covers a wide range of topics, including finance, marketing, technology, and government affairs. Follow her on Twitter @branddoktor.