March 8, 2022

How Financing Can Help Independent Contractors in Times of Need

Financing Can Help Independent Contractors in Times of Need

Independent contractors play a huge role in economic advancement. Reduced fixed costs, workforce flexibility, and being your own boss have become more appealing for many professionals. In 2021, we saw a significant increase in the number of independent contractors compared to 2017 data. The Statista Research Department recorded 23.9 million independent contractors, an 11.9 million increase over four years.

Despite this drastic increase, gig economy workers still find it challenging to secure a loan to keep their business afloat. Reliable access to working capital is crucial to the success of independent contractors, regardless of the industry they’re in.

There are several types of independent contractor loans every gig economy worker should know about. In this article, we’ll discuss the most common reasons contractors apply for a personal loan, as well as the types of financing you can qualify for.

Why Should You Apply for an Independent Contractor Loan?

There are several reasons why an independent contractor may need a loan, and here are some of the most common ones:

  • Delayed Client Payments

Most businesses and independent contractors invoice their clients. Instead of getting paid upfront for services rendered, contractors receive a pledge from their clients to pay at a specific date every month. Problems in cash flow arise when clients dally with settling their invoices. An independent contractor loancan assist by advancing the contractor a percentage of the amount owed in invoices.

  • Fluctuating Income

The biggest challenge to being a 1099 contractor is fluctuating income. To keep your business afloat, you have to make sure you have enough cash to pay your bills, purchase supplies, and cover day-to-day expenses. To do that, your customers should consistently pay on time, but, as mentioned, that doesn’t always happen. Personal loans for 1099 employees can help bridge the gap so you can continue working on your business.

  • Emergencies and Catastrophes

The COVID-19 pandemic has demonstrated the devastating effects an unforeseen catastrophe could have on any country’s economy. A flailing economy can bring down businesses and independent contractors who may have already suffered from unstable cash flow. The government could extend assistance through a specialized loan for 1099 workers.

In other words, financing provides a means for independent workers to stabilize cash flow until they recover. Financing also helps preserve cash flow by stretching repayment terms instead of charging a one-time, lump-sum figure.

Types of Financing Available for 1099 Workers

Here are some of the loans for 1099 employees you might want to apply for:

  • Equipment Financing

Most independent contractors rely on machinery, vehicles, laptops, or some form of equipment to get the job done. However, buying equipment out of pocket may not be feasible for most. Equipment financing gives you the financial resources to buy or lease much-needed equipment. Whether you’re a web designer, rideshare driver, plumber, or electrician, you may benefit from equipment financing.

There are two types of equipment financing: equipment loans and equipment leases. Equipment loans are structured like a classic business term loan, with fixed monthly payments until the loan is repaid. At the end of the term, you’ll own the equipment.

On the other hand, equipment leases allow you to lease a piece of equipment by paying a fixed fee per month. You can use the equipment until the end of the term. You then have the option to buy the equipment, extend the lease, or terminate the lease.

  • 500 to 2000 Dollar Loans

Lenders that cater to independent contractors can let you advance up to $5000 upfront by selling a portion of your future sales in exchange for immediate cash. The payments are automatically debited from your bank account, minus a small service fee. You can use the money to pay for unforeseen expenses, address cash flow issues, and more.

  • Small Business Administration Loans

The Small Business Administration partially guarantees SBA loans for small businesses and independent contractors. The biggest advantage of applying for an SBA loan is the high borrowing limits and extended repayment terms.

You could apply for up to $5.5 million issued by any SBA’s accredited financial institutions. To be eligible, you will need to fit the SBA’s definition of a small business, must operate a for-profit business in the United States, and provide proof that you’ve applied for traditional financing but were denied.

  • Small Business Lending Fund

The Small Business Lending Fund provides capital for small and medium enterprises. Like the Small Business Administration loans, the SBLF offers funding to community banks and community development funds. These institutions then forward the funds to SMEs through financing and loans for independent contractors.

The SBLF is a program by the U.S. Department of the Treasury, and they extended up to $4 billion to qualified lending institutions as of 2021.

  • Asset-Based Financing

Asset-based financing is a loan guaranteed by any of your fixed assets. For instance, if you’re a Grab or Lyft driver, you can pledge your car as collateral for a loan. You can do the same to your condominium unit if you have an Airbnb business.

The downside to this is that the lending company now has a claim on the asset you have pledged. In other words, they can repossess your asset if you default on your obligation. However, some lenders are willing to negotiate repayment instead of repossessing and going through an auction.

Independent contractors and self-employed individuals have the flexibility to earn as much as they want. However, they are also subject to the fluctuations inherent in a highly competitive market. In times of special need and when cash flow problems arise, independent contractor financing can help bridge the gap in cash flow.

There are many types of small business loans and cash advances available for workers in the gig economy. You just need to understand what each of these loans provides, what they require, and how you can qualify. It’s best to do your research before you even need the financing. When the time comes, you’ll know where to go for help.